Alternatives to workplace pensions

At a glance

• Workplace pensions are the first port of call for employees to build a savings pot for retirement, but they’re not the only option.
• Some workers may like a retirement savings pot that’s different to their workplace pension, while those who are self-employed will need to save via alternative means.
• Alternatives to workplace pensions typically include private pensions and investments, and there are various options to consider.

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 forms of retirement savings, alternatives to pensions are available.

What is a workplace pension?

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 – UK residents aged between 22 and state pension age who earn at least £10,000 a year – now have a suitable pension scheme set up.

This means many will be saving at least 8% of their qualifying earnings in a pension each year, made up of 5% from their own wages (including Government tax relief) and at least 3% from employer contributions. It’s the contributions from the employer and tax relief from the Government that really make workplace pensions worthwhile, as you’re essentially getting “free” money that you can use for retirement. Moreover, because the money is invested, it has the potential to grow over time (though remember that, as is the case with all investments, there’s no guarantee). It can be accessed from the age of 55 (though this will increase to 57 in 2028).

Note that other workers may voluntarily sign up to a workplace pension scheme, but in this case the employer doesn’t have to make contributions unless they choose to do so. Remember too that because you’ll likely be enrolled with each new employer, you may accumulate several pension pots over the course of your working life, and it can be easy for old ones to slip through the net. Here’s how to find them.

Workplace pension alternatives

Instead of a workplace pension, below are a few options you could consider.

Personal pensions

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).

SIPPs

SIPPs work in a similar way to 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).

Stakeholder pensions

A stakeholder pension is a form of private pension that has the benefit of offering low minimum contributions – which means they’re 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 workplace pension savings, money contributed to a stakeholder pension is normally invested in stocks and shares. Again, money from a stakeholder pension can currently be accessed from the age of 55.

Lifetime ISAs

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.

There are both cash and stocks and shares LISAs available depending on your preference and risk appetite. 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 from the age of 60, and money withdrawn for any other reason will incur a 25% interest penalty (with a few exceptions).

Yet these rules are precisely why many savers are using LISAs as an alternative to pensions, in that they’re using it to specifically save for retirement and can still benefit from Government contributions – this time in the form of a bonus – and because it’s an ISA any interest (or growth) will be tax-free as well. However, the low investment limit means they perhaps shouldn’t be used as the only pension saving alternative.

Stocks and shares ISAs

Stocks and shares ISAs can be a great alternative to pensions for some savers. Up to £20,000 can be invested in the current tax year, and they have the potential for far greater growth than saving in cash. However, savers should be aware that stocks and shares ISAs come with the same risks as standard investments and could result in them losing their initial capital. As stock markets can fluctuate, investing in this way should only be considered by those with an appetite for risk and a 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. However, those with little to no experience should consider taking financial advice, particularly where larger sums are involved. As stocks and 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.

Cash ISAs

Cash ISAs could be a viable alternative for some pension savers, the caveat being that returns will likely be lower than with stocks and shares ISAs or other forms of stock market investing. Yet the fact that there is zero risk involved in cash saving could outweigh that, and because it’s an ISA, returns will still be tax-free. Check out our ISA charts for the latest top rates to maximise your returns.

Investing in property

While having a pension fund will typically be the best option for many savers, 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.

Other forms of investment

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 perhaps consider these potential options:

Venture capital trusts

Venture capital trusts (VCTs) could be an 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

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.

Assets

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 or similar assets for something more tangible.

Need more advice?

Whatever you decide, always consider your options carefully and seek suitable advice before you go ahead. An independent financial adviser could be invaluable, helping you consider your options to work out which could work best alongside your long-term financial goals. 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 could often work best.