For many UK savers, the traditional pension is the backbone of, or the sole aspect of their retirement planning. Given the tax relief and in many cases, employer contributions, pensions are hard to beat when it comes to planning for your later years. However, with ‘triple lock pensions’ and Lifetime Allowance (LTA) constantly under debate in the political arena, a growing number of people are seeking alternative ways to diversify their retirement income.
In fact, exploring the best pension alternatives is considered a necessity for modern retirement by many financial planning experts. Below we look at some potential alternative investment options that could carry you to a comfortable retirement.
1. ISAs
Individual Savings Accounts (ISAs) are possibly the most obvious alternative to a pension. While you don’t get the upfront tax relief associated with pensions, the primary draw of an ISA is its flexibility and tax-free withdrawals. For example, if you need the money at 45 to fund a career change or a house renovation, you can take it without a 55% tax sting.
Stocks and Shares ISAs
This specialist ISA allows you to invest up to £20,000 per year (combined with any other ISAs held, for the 2024/25 tax year) without paying any Capital Gains Tax or Dividend Tax on the growth. Because it involves investing rather than saving, it offers the potential for higher returns over the long term, but it also comes with higher risk.
Lifetime ISAs (LISAs)
If you're under 40, the LISA is specifically for those aged 18–39. The benefit of this product is the government bonus of 25% bonus (up to £1,000 a year) added to your contributions. If held until age 60, the funds can be accessed tax-free for retirement, making it superior to a traditional pension for basic-rate taxpayers. Many LISA investors also choose to use their savings as a property deposit when buying their first home. This can also be done tax-free.
2. Buy-to-Let Property
Another popular investment is buy-to-let property. While the landscape has shifted due to the removal of interest rate tax relief (Section 24) and the additional 3% Stamp Duty surcharge, investors operating as landlords via Limited Companies can maintain a tax efficient investment option.
However, keep in mind that this type of investment typically needs more oversight and is rarely as passive as a fund manager-led pension.
3. Venture Capital
For those with a higher risk appetite, schemes like the Enterprise Investment Scheme (EIS) or Venture Capital Trusts (VCTs) offer significant tax incentives. These schemes are designed to encourage investment in small, high-growth UK companies.
You can receive up to 30% income tax relief on the amount invested, but these are high-risk ventures where the capital is non-liquid. However, these are often considered effective top-up strategies for those investors who have already maximised their more traditional pension pots.
4. Should you diversify your retirement income?
There is rarely a "one-size-fits-all" answer, but the most robust retirement strategies are typically the most diverse. The term ‘don’t put all your eggs in one basket’ is particularly apt in later life.
To ensure a diverse retirement income portfolio, a blend of several of the aforementioned vehicles is recommended. By combining the tax efficiency of a pension with the flexibility of an ISA and the tangible growth of property, you can create a retirement income that is resilient to changing government policies.
If you are looking to navigate these complex choices, specialist advice from a financial adviser with experience in later life investments is recommended. Whether you simply need help comparing providers; or to build a complete exit strategy from the workforce, speaking to an investment expert will help you make the most of your future finances.
