Do you need a workplace pension?

Lifetime ISA (LISAs)

Shorter term priorities might include saving a deposit for your first home, so you might look at a Lifetime ISA (LISA) alongside your pension. For people up to age 40, the government adds a 25% bonus to everything you save up to £4,000 a year – that’s potentially a free £1,000 a year.

When they were first launched, some thought the LISA would be a viable alternative to a more traditional pension, as you can withdraw your money at any time before you turn 60.

However, doing this incurs a penalty charge of 25% on the whole amount, unless you use it to buy your first property under the age of 40, or are terminally ill with less than a year to live, so they are suited to saving towards a first home or as long-term additional savings.

Hewitson said: “There’s definitely a place for LISAs for people under 40 and they’re a great way to create a savings habit that can actually help people with their pension planning. Once they have used the LISA savings for their house deposit, they could carry on that savings habit but put some of it as an additional contribution into their pension savings.”

Spencer added: “Everyone’s circumstances are different and as a general rule, a pension is better than a LISA for meeting your retirement objectives. However, for buying your first home, a LISA could be a valuable savings vehicle for some.”

Traditional ISA (ISAs)

Traditional ISAs have a £20,000-a-year limit (half that of a pension) but unlike a pension, it gives you access to your savings before retirement and there is no tax to pay on any investment growth you earn or money you withdraw.

Hewitson said: “You save from your net rather than your gross pay so you’ll have less money left over each month than you would if you paid the same amount into a pension, but the cash you take from an ISA is tax-free and access isn’t restricted by age.”

There are two kinds of ISA: a cash ISA, which is basically a savings account, or an ISA that invests in stocks and shares – both have a level of risk associated with them.

“The value of any investment funds you have in an ISA can go down as well as up, just as they can in a DC pension like the USS Investment Builder,” said Spencer.

Hewitson added: “Even cash isn’t a risk-free investment due to the effect of inflation on its buying power, however they are relatively easy to understand and easy to access.”

“Whilst a workplace pension benefits from tax relief on contributions, employer contributions and in some cases a guaranteed income (DB) at retirement, an ISA is a different thing altogether, providing an additional savings vehicle suited to more flexible savings needs.”

Some people see property as a safe bet when it comes to providing an income for the future. However, Hewitson said: “This old idea of bricks and mortar providing certainty has no basis in fact. Yes, property can deliver strong returns but it can be an extremely high-risk investment.”

Spencer added: “As a single investment ‘asset’, it is neither diversified (your eggs may all be in one basket) nor easy to turn back into cash if you need to in a hurry.”

Then there are the costs associated with letting property – landlord insurance, maintenance and any periods where you don’t have a tenant – and they can mount up.

Not many people can afford to buy investment properties when they are working hard to pay off the mortgages on their first home, so a rental property is out of scope for many.

But if you’re thinking about using your pension savings to buy an investment property, consider how much you actually need in that pension pot first,” said Hewitson.

After your tax-free cash allowance, the rest of your pension pot is subject to income tax; if you need to take a large amount out to buy a property, you’re likely to make a hefty tax payment first, which could reduce the amount of cash available for a purchase."

In addition, mortgage interest tax relief has dropped to 50% for buy-to-let landlords and it will be cut to zero in 2020, and changes to licensing and regulation as well as tougher borrowing criteria could be a turn-off.

And while, in the right circumstances, property can be a way to generate investment gains and/or an income stream, we can’t forget that rental income is taxable and sellers could be hit with capital gains tax, if they want to get access to their cash."

Hewitson points out that it is becoming more popular to use your own home to provide you with a retirement income. He said: “Paying off the mortgage as quickly as possible and selling up in retirement might sound like a good plan, but even the most hard-nosed individuals are likely to have a sentimental streak –– and when it comes to selling the family home, it can be very tough, emotionally, to leave.”

Emotional quandaries aside, if using your home to provide cash later in life is an option you’re thinking about, it’s also important to consider that there are a number of ways of achieving this, from downsizing to equity release.

Equity release looks great in those daytime TV adverts but according to Hewitson, this is often the last resort for people approaching or in retirement.

He said: “It’s a genuine funding solution, releasing the equity in your home and living there until you pass away – but as with selling your home, people will need to consider value and the reduction in their estate for any loved ones.”

Remember though, whatever route you consider when buying, selling or accessing equity in a property, there will be fees and costs along the way.

According to Hewitson, saving into a pension is probably one of the most sensible financial moves you’ll ever make.

He said: “Why wouldn’t you accept free money from both the government and your employer if it’s available?”

In a DB arrangement, like the Retirement Income Builder, this saving also buys members a secure retirement income.

The Investment Builder – the DC section of the scheme – gives members the opportunity to top up their guaranteed pension income by investing additional contributions into a range of funds, and since the 2015 pension freedoms, it gives them a range of flexible ways to use their pots even before they retire.

Hewitson said: “As part of an integrated savings strategy which is tailored to meet your individual short, medium and long-term goals, workplace pensions offer a tax-efficient way to look after yourself in the future with DB pensions offering security and DC arrangements providing choice and flexibility.”

Spencer added: “The smart money doesn’t put all its eggs in one basket, but it probably makes sure one of its baskets is a pension. It also takes professional advice when it’s needed, and we have a directory of regulated advisers on our website that allows people to tailor their preferences and choose how they’d like to engage with an adviser.”

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Please keep in mind that past performance is not a guide to future performance, and the value of investments may go down as well as up. Each investment option available to you has specific risks associated with it, and the level of risk varies. It’s important that the level of risk associated with any savings or investments is appropriate for your circumstances.

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