The alternatives to workplace pensions

A workplace pension offers a convenient way to save for retirement. You’ll benefit from employer contributions as well as Government tax relief, and thanks to automatic enrolment, the majority of eligible workers now have a suitable pension scheme set up. Though because you’ll likely be enrolled with each new employer, it’s easy for old pension pots to slip through the net. Here’s how to find them.

Any worker who is aged between 22 and state pension age, earns at least £10,000 a year and usually works in the UK is entitled to be automatically enrolled into a workplace pension. Other workers may voluntarily sign up, but the employer doesn’t have to make contributions unless they choose to do so.

There’s the chance to opt out as well, a route that may be taken by those considering increasing mortgage repayments instead, but opting out completely is rarely recommended. Indeed, it’s normally best to start saving for a pension as soon as possible, giving you the best possible chance of building up a decent retirement pot for your post-work years. Just make sure you’re aware of the tax rules surrounding access to your funds.

Workplace pensions may be the standard way to save for retirement for the majority, but they’re not the only option. For employees who are not eligible for auto-enrolment or who have chosen to opt out, or perhaps those who are self-employed or want to have additional retirement savings, alternative ways to save towards retirement are available. Make sure to seek suitable pensions advice, such as that available from Pension Wise, and read on to find out more about a few alternatives. 

For those not in a workplace pension scheme, a private pension is often the most popular choice. Two of the most common types of personal pensions are stakeholder pensions and self-invested personal pensions (SIPPs).

A stakeholder pension has the benefit of offering low minimum contributions – which is often popular with those on low incomes or who are self-employed – as well as limited charges, charge-free transfers, flexible contributions, and a default investment fund. As with pension savings, money contributed to a stakeholder pension is normally invested in stocks and shares and savers can often choose from a range of funds in which to invest. Currently, money from a stakeholder pension can be accessed from the age of 55, however, savers should be aware that this will increase to age 57 from 2028.

SIPPs work in a similar way to stakeholder pensions and other personal pensions but have the difference of giving the saver more flexibility with the investments they choose. SIPPs are becoming more popular with pension savers, but those considering a SIPP should be aware that they require a more hands-on approach, and some knowledge about investments is likely to be needed. In addition to this, SIPPs often have higher charges than other types of personal pensions and stakeholder pensions, and as such they tend to be more suitable for those looking to invest larger funds. As with other types of pensions, money from SIPPs can currently be accessed from the age of 55 (though this will also increase to 57 in 2028).

The state pension is of course a viable alternative to a workplace pension and will provide a baseline income for many, but it perhaps shouldn’t be your sole focus if you can afford to save more elsewhere. It currently offers £203.85 per week to those eligible for the full state pension, while those who reached state pension age before 6 April 2016 will get £156.20 per week under the basic state pension (though this can be topped up by the additional state pension for those eligible).

You’ll need at least 10 years on your National Insurance record to qualify for a state pension, but will need 35 qualifying years to get the full amount. The number of years you have on your record will reflect the amount you’ll be entitled to.

Currently, the state pension age is set at 66, but this will increase to 67 between 2026 and 2028 and to 68 between 2044 and 2046.

Pension savers looking for an alternative yet secure way to save for their retirement can consider a Lifetime ISA (LISA). A LISA can be opened by anyone aged 18-39, but savings can be added up until the age of 50. Up to £4,000 per year can be saved into a LISA, which benefits from a 25% Government bonus – as a result, if the maximum £4,000 is saved into a LISA, an extra £1,000 is added via the Government’s top-up.

Money can be kept in a LISA after the age of 50, but you won’t be able to add more funds and the Government bonus will no longer be added either. If the money saved is not used to purchase a first home, it can only be withdrawn after the age of 60 for retirement, and money withdrawn for any other reason will incur a 25% interest penalty (with a few exceptions).

Ideally, those looking to save towards retirement should choose a pension, whether personal or workplace, as they will benefit from pension tax allowances. But for those looking to start additional retirement savings, investing elsewhere could be a viable alternative. Check out our guide on how to get your pension investment strategy right and make sure you’re aware of the tax rules surrounding investments, and read on for a few potential options.

Stocks & shares ISAs allow a tax-free limit of £20,000 to be invested for the current tax year, and have the potential for far greater returns than saving in cash. However, savers should be aware that stocks & shares ISAs come with the same risks as standard investments and could result in savers losing their initial capital. As stock markets can fluctuate, investing in this way should only be considered by those with a high risk appetite and long-term investment outlook.

For those happy with the risks, investing in stocks and shares is easier with the growth of DIY and robo-advice investment platforms, such as Etoro and interactive investor. However, those with little to no experience should consider taking financial advice, particularly where larger sums are involved. As stocks & shares ISAs are not a pension product, investors can withdraw their funds at any time they wish, meaning that they do not have to wait until they reach the age of 55 to access their funds.

Again, normally having a pension fund is the best option, but investing in property can be a good way to boost additional retirement savings. This is often achieved via buy-to-let investment, and those considering this route should be aware that although it can yield good returns, there are additional costs involved, such as day-to-day property management and maintenance costs, as well as the cost of covering mortgage repayments during times when the property is not being rented. The tax changes in recent years have made it slightly less lucrative, too, so it’s worth speaking to a financial adviser to make sure that this is the option for you.

Venture capital trusts (VCTs) could be another potential option for those happy to take on more risk. These trusts take the form of UK-listed companies that invest in smaller firms not quoted on a stock exchange, offering greater potential for growth but also greater risk. They should only be considered by those comfortable with that compromise, and as with many other forms of investment, should be viewed as a long-term undertaking. This is not only to maximise the chance of returns, but also because VCTs offer income tax relief on any investment held for at least five years.

Enterprise investment schemes (EISs) are a similar kind of venture capital scheme that could be considered. Another long-term and high-risk option, EISs invest in unquoted and illiquid stock, but offer generous tax incentives including tax relief, exemption from capital gains tax and loss relief. Again, it’s worth speaking to a financial adviser to make sure you’re fully aware of your options and the risks involved.

Alongside buy-to-let investment, there may be other assets you could consider investing in as well. A real estate investment trust could be an option if you want to pool your funds with other investments to offer a unique way to invest in property, or maybe you want to invest in gold for something more tangible.

Whatever you decide, always consider your options carefully and seek suitable advice before you go ahead – to help, you can currently get a free review of your savings and investments from our preferred partner Kellands (Ts&Cs apply) – and remember that a “mix and match” approach to retirement saving can often work best.