5 min read

Why your pension needn’t be the only source of income in later life

The main advantages of pensions are contributions from your employer in a workplace scheme and tax relief on your contributions if you are a UK taxpayer. But if you’re self-employed, you’ve maxed out your workplace pension contributions, or you want early access to your money, there are more avenues available.

Here are four options to think about when preparing financially for retirement.

Investing in stocks, bonds and funds

There are many DIY investing options available to those who feel confident building their own portfolio. You could invest directly in financial markets by buying individual stocks or bonds through an online stockbroker if you feel comfortable doing your own research.

Bonds and dividend-paying stocks can be a good way to generate an income in retirement, as well as giving you the potential for capital growth. But there will be greater risks attached to holding just a few individual stocks rather than spreading your money across a wide range of asset types.

If you’re a novice investor, it might be better to let a professional fund manager do the stock selection for you. There are plenty of funds on the market that are designed to give you a particular target income in retirement, including the increasingly popular multi-asset income funds. You could also buy equity income, bond or property funds which offer a regular yield.

A Stocks & Shares ISA allows you to hold a combination of funds, stocks and other financial assets in one tax-efficient wrapper. An advantage of this is that you can sell your investments and withdraw your cash whenever you want, you don’t have to wait until you’re 55, as you do with a pension. Be aware though, because stocks and shares are dependent on the market the value can go down as well as up.

If stocks and shares aren’t for you, you could also take a look at information on alternative investments to help boost your pension pot.

Could investing in property be a ‘pension alternative’?

You often hear people say, ‘my property is my pension’, and property can certainly work as an income generator in retirement.

The mistake some people make is thinking that the home they live in can act as their pension if they own it outright. You may be sitting on an asset, but the problem is it isn’t a liquid asset and can’t give you an income unless you sell up and downsize.

If you choose to do so, you would need to be willing to move house in your 60s or 70s, and you would have to hope that market demand would be strong enough to give you a fair price for your property.

To release money from your home without selling it, you would typically need to go down the route of equity release, for example with a lifetime mortgage. They are an increasingly popular way to fund retirement however you can’t do this without taking financial advice first. For example, a financial adviser will make you aware of how releasing equity in this way will reduce the value of your estate.

Owning a buy-to-let property could give you regular rental income too, but there are risks involved such as falling property values and non-paying tenants. You may also have to pay costs such as letting agent fees, stamp duty, and income tax on your rental profits.

Taking part in workplace share schemes

If your company offers a stock purchase scheme such as a Share Incentive Plan or Save as You Earn, this might be worth doing as a retirement savings strategy.

With Save As You Earn, you save up to £500 a month into the scheme from your salary each month. After three to five years, you can receive a tax-free bonus, and can choose whether to cash out or use the money to buy shares in the company. If you choose to buy, you get the price at which the shares were trading at the start of the scheme. This might be a good deal or not, depending on the past and current value of the shares, and whether you think they will go up in future. It’s important to be aware that these benefits may be lost or reduced if you change jobs within the defined period.

Taking out a Lifetime ISA

The Lifetime ISA (LISA) is a savings vehicle which can be used to save towards buying your first home, or retirement. If you are aged 18-39 you can apply for a Lifetime ISA and receive a government bonus of 25% on top of whatever you save. The maximum you can save is £4,000 a year, until you turn 50. There’s more eligibility criteria that applies so make sure you read the small print.

You can withdraw the money tax-free at age 60 to use for your retirement, but if you want to access the money sooner for any other reason except to buy your first property, you will be penalised. Although you may still receive the government bonus but the amount you withdraw will be subject to a 25% withdrawal charge.

The Lifetime ISA can take the form of a Cash Lifetime ISA or a Stocks & Shares Lifetime ISA. The generous bonus makes the Lifetime ISA attractive, but you can only save up to £128,000 to get a maximum bonus of £32,000. Bear in mind these figures are based on the current LISA limits and may change in the future.

In a pension, you can get tax relief on contributions up to a maximum of £40,000 a year, depending on your salary, with the lifetime allowance capped at £1million. Of course, this too may change in the future so it’s worth staying abreast of the annual pension allowance.

The ideal financial strategy might involve a combination of these different options to spread your risk and help give you the best chance of a comfortable life in retirement.


Written by Hannah Smith – Financial Journalist

Note: Whilst we take care to ensure Talking Finance content is accurate at the time of publication, individual circumstances can differ so please don’t rely on it when making financial decisions. The opinions expressed within this blog are those of the author and not necessarily of OneFamily.