Pensions Alternatives
Different Ways of Saving for Retirement
Pensions are usually the best method of retirement saving. It's said that if they didn't exist we'd all be clamouring to invent them.
However they're not the only way to save up for your old age. Here are some alternatives.
ISA's. (Individual Savings
Accounts)
Advantages of ISA's over Personal Pensions
Endowment Policies
Property
Rare collections
Under the floorboards/ Cash in the mattress
Work during retirement
ISA's. (Individual Savings Accounts).
These are another way the government encourages us to invest and save our money.
They are special types of investments provided by ISA managers (basically the usual pension providers and investment companies) which are free of income and capital gains tax - so they're often called a "tax free wrapper" in which you can place your savings.
You can have an ISA and a private pension at the same time.
Your ISA manager could invest your money in just about anything, anywhere in the world.
The main difference with a pension is that you make your payments into an ISA from your net income ie income that you've already been taxed on. However, after this, ISAs are exempt from income tax and capital gains tax.
If, on retirement, you convert the ISA to an annuity you would pay less tax on the income from it than a pension fund annuity.
There are "mini-ISAs" and "maxi-ISAs".
You can invest up to £7,000 a year in a "maxi ISA", (under one ISA manager) which can be a combination of cash, insurance or shares.
Or you can have various "mini ISAs" (each one can be run by a different ISA manager). For example you could have a "life insurance mini ISA" - into which you can invest a maximum of £1,000 per year; a "mini cash ISA" - into which up to £3,000 can be invested per year; or a "stocks and shares mini ISA" - into which £3,000 can be invested per year. Oh yes and you can't have a "mini ISA" and a "maxi ISA" at the same time.
Sounds so simple doesn't it? Er no we don't think so either....and the tax benefits are far from clear - if you're interested we strongly recommend you ask an IFA about them in more detail.
ISAs replaced PEPs and TESSAs from 1/4/99 as the standard vehicle for giving tax breaks to individuals trying to save. To have one you have to be over 18 and "resident in the UK for tax purposes.
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Advantages of ISA's over Personal Pensions
One of the problems with a personal pension is that if you have no earnings, you're probably not getting a tax break. But you don't have to be earning to contribute to an ISA. In which case the ISA is your best savings vehicle.
The other main advantage of ISAs over pensions is flexibility particularly your ability to get to your money at any time. But some see this as dangerous ie that you can take out money at any time which you should be putting away. Are you disciplined enough?
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Endowment Policies
This is where you pay a regular sum into an investment policy operated by an insurance/pension company for a fixed period of at least ten years. You would also get life insurance included.
This used to be the traditional way to organise regular savings and became a popular method of mortgage repayment. The downside is high charges, possibly disappointing performances and poor surrender values. They're not flexible so don't get involved with them unless an IFA recommends one for a very good reason.
Endowments are now spectacularly out of favour thanks to very bad publicity following warnings from many household name providers about poor performance - meaning people have been warned to increase their mortgage payments in order to own their home on retirement
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Investing in your own property
The idea here is you keep moving up into a bigger house during your career and on retirement "trade down" to a smaller house. You're left with no rent to pay and profit which you live off.
The positive aspect is you are forced to make your mortgage payments during your career - unless you want to be evicted - unlike say a flexible pension where you may find it hard to choose between those cream cakes and increasing your pension contribution.
Also, property is seen as a generally safe foundation although it doesn't tend to appreciate in value as much as other investments can.
The down side is that expenses during your working life will be higher due to being in a larger house e.g. heating, insurance payments etc.
If and when you sell your house at retirement you then have a problem of converting the capital sum (ie your profit) into a regular income.
Or if you are renting the property out (having brought a smaller second home) who will manage this as you get older and at what cost.
There's an argument that investing your pension in shares (ie equities) has historically been more profitable. However this is based on the strong share performance of the last 50 years. Now that things aren't looking so great for shares a lot of people are looking to invest in property instead.
Buying to Let etc
As confidence in traditional pensions continues to decline there's an increasing trend in looking to property as a way of saving in a more enterprising way than simply investing in your own home.
A typical example would be "buy to let" - ie where you buy a property with the aim of letting it out to tenants. Ideally this covers the mortgage and you end up being able to eventually sell the property.
If you're interested in this and want to read specifically about renting to students in a university town or commuters in suburbia, the Council of Mortgage Lenders has two leaflets 'Buying to Let' and 'Thinking of Buying a Residential Property to Let' You can order them by phone on 020 7440 2255.
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Rare collections
Gold, jewellery, old records, beer mats, jazz records, antique furniture could all be worth a lot of money if you collect them for selling.
But frankly it's a bit too speculative for basing your comfortable retirement on.
You would need to be insured to cover all eventualities. And while they may increase in value they don't benefit from the magic of compound interest.
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Under the floorboards/ Cash in the mattress
This used to be how many people saved. We put this in because we've heard of a couple of people talking about it seriously in the sense that they don't trust the banks etc.
Sorry to state the obvious but it's not a very advisable strategy in this day and age. Besides losing the power of compound interest that investments can have, there's no insurance against fire, theft and so on.
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Work
Alternatively you could work during your retirement. The idea is you learn a new skill to plan a part-time retirement business.
Recently there's been a lot of media coverage of the idea that we're all going to have to work into our seventies anyway. And then there's the growing acceptance that early retirement is a sure way to an early grave and that if you want to live a longer and healthy life you should keep active, ideally doing something you enjoy.
Have a look at a few articles about this click here
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