Planning your retirement Other retirement options
Convert your pension savings into a retirement income
There’s a big gap between the retirement income most of us want, and what we’ll get if we rely on a state pension.
Company pension schemes
If you are offered access to a company pension scheme, whether it be one of the few remaining final salary deals, a 'money purchase' or group personal pension (GPP) scheme, you should opt to join it.
With final-salary schemes, the amount of pension you get is determined by the number of years you’ve been a scheme member and your final salary.
With both money purchase and GPP schemes, you pay money into a retirement fund which is then invested. Your employer will make contributions to the scheme to complement your own pension payments. When you retire, the retirement fund is used to buy an annuity.
Deciding not to join one of these schemes is like turning down extra pay.
Personal pensions
If your employer doesn’t offer a pension to which they contribute, or if you are self-employed, you may decide to arrange one yourself. The options are:
- a personal pension
- a stakeholder pension
These can be arranged directly with an insurance or a pensions company, or through an independent financial adviser.
| Stakeholder pension | ||||
|---|---|---|---|---|
| Amount you pay each month | Total paid into pension | Fund value if started aged 30a | Fund value if started aged 40a | Fund value if started aged 50a |
| Non-taxpayer at retirement | ||||
| £50 | £62.50 | £86,268 | £42,474 | £18,019 |
| £100 | £125.00 | £172,536 | £84,948 | £36,039 |
| £200 | £250.00 | £345,073 | £169,895 | £72,077 |
| Basic-rate taxpayer | ||||
| £50 | £62.50 | £73,328 | £36,103 | £15,316 |
| £100 | £125.00 | £146,656 | £72,205 | £30,633 |
| £200 | £250.00 | £293,312 | £144,411 | £61,266 |
| Higher-rate taxpayer | ||||
| £50 | £83.33 | £97,771 | £48,137 | £20,422 |
| £100 | £166.67 | £195,541 | £96,274 | £40,844 |
| £200 | £333.33 | £391,082 | £192,548 | £81,687 |
Table notes
- If you are a basic rate taxpayer when paying in and a non-taxpayer when you draw your pension
- If you are a basic rate taxpayer when paying in and the same when you draw your pension
- If you are a higher rate taxpayer when paying in and a basic-taxpayer when you draw your pension
The table assumes tax relief of 20% will be added to your premium.
Unlike a company pension, you'll be the only person contributing, but you receive tax relief on the money you pay in. This means your contribution is increased by an amount equivalent to basic-rate tax (or 40% if you’re a higher-rate taxpayer).
Every £50 you pay in adds £62.50 to your pension. Stakeholder pensions, which have been around since 2001, are a form of personal pension.
Pros
- Buying an annuity means you don’t have to worry about investment decisions later in life. An annuity will pay out for as long as you live
- Tax relief means your pension payments are given a boost. A contribution of £100 a month becomes £125.00 for basic-rate taxpayers. Higher-rate taxpayers get additional tax relief
- A quarter of your pension fund can be taken as a tax-free lump sum (or all of it, if the fund is relatively small)
Saving for your retirement is very important
Cons
- You can’t access the money until you reach 55
- You can’t use the money you’ve saved as you wish. An annuity must be purchased before you reach the age of 77 to provide an income (See our guide to annuities for more information)
- Income from a pension is taxable
- Should you die soon after you retire, the money in your pension fund will go to the provider, unless you’ve chosen a guaranteed or joint-life annuity. A joint-life annuity will continue to pay an income to your spouse or partner after you die for the rest of their life. A guaranteed annuity will continue for pay for a set number of years (usually five or ten years).
For more advice on pensions, see our book Pensions Explained, which covers state, personal and company pension funds.
Isas - an alternative to pensions?
Individual savings accounts (Isas) are another tax-efficient way to save but are more flexible than pensions, as you can get your money out before you retire.
Cash Isas and stocks and shares Isas
You have the choice of investing in two types of Isa: cash or stocks and shares.
Cash Isas pay interest like savings accounts, while stocks and shares Isas are investments in shares and other stock market-linked investments. Stocks and shares Isas may earn you higher returns but there are no guarantees.
The interest you receive on cash Isas is tax-free, while 10% tax is deducted from dividends paid on stocks and shares Isas.
What you can pay in
The maximum amount you can invest each year is currently £10,200. £5,100 is the maximum you can put into a cash Isa with the balance going into stocks and shares if you wish.
Pros
- You can spend savings when you want
- Money you take out is tax-free
- Money saved in an Isa can be passed on in your will.
Cons
- The amount you can put in is limited
- Isa contributions do not attract tax relief, unlike pension contributions.
For more on Isas, see the Which? Best Rate cash Isa reviews or our guides to and stocks and shares Isas.
Finance your retirement with property investment
Around a quarter of people in our survey said they intended to use either their own property or a buy-to-let property as part of their retirement finance plans.
Buy-to-let
Buy-to-let is well suited to retirement investing. You can either sell the property when you retire, or continue to own and let it out to give you income in your old age.
But it isn’t as easy to make a fortune as it looks on TV property shows, and if you can’t find a tenant you’ll have to bear the full cost of the mortgage yourself every month.
- To find the best retirement options for you, call the Which? Money Helpline
- Considering buying to let? Find all you need to know in our expert guide on letting a property
- For investment ideas, see our guide to different types of investment
