Deciding where you save your money is a major part of retirement planning

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There are lots of different saving options when it comes to retirement planning and so it’s important to consider what’s going to work best for you. Once you’ve worked out how much you’ll need in retirement you’ve then got to decide on the best place to save that money and some of the most popular options are outlined below. 

Workplace pensions 

The government is trying to get more people saving for their retirement, and auto-enrolment legislation makes it mandatory for employers to:

  • Automatically enrol eligible jobholders into a suitable scheme
  • Allow non-eligible jobholders the right to opt-in to the scheme
  • Provide entitled workers access to a scheme if they ask to join 

The employer is also required to contribute where jobholders are auto-enrolled or opt-in. The biggest companies have already done this and some of the smaller and newer employers have until 2018 to comply with the rules.

Workplace pensions are explained in a separate blog but they’re definitely worth considering, because over the course of your career the tax relief you receive on your own contributions and the mandatory contributions that employers have to make on your behalf will have a positive impact on the amount you’ll save.

If you’ve worked for a number of different employers then you may have multiple workplace pensions. If this is the case it’s worth thinking about consolidating these to make it easier to keep track of where your pension savings are invested. You could also end up paying more than you need to in charges if you’ve got lots of different pensions and by consolidating you’ll make sure you don’t forget about any.

Personal pensions 

If you’re self-employed you won’t have access to a workplace pension, but you can set up a personal pension plan to save for retirement. And even if you contribute to a workplace pension scheme you can still set up and pay into a personal pension.

The monthly contributions you make to a personal pension benefit from tax relief at source at the basic rate. In addition to basic rate tax relief, higher rate and additional rate taxpayers can claim extra relief through their self-assessment form or directly from HMRC.

You’re entitled to tax relief on the higher of £3,600 or 100% of your relevant earnings. There is a limit to the total amount of contributions that can be paid into defined contribution pension schemes and the total amount of benefits that you can build up in defined benefit pension scheme each year, for tax relief purposes, and this is called the Annual Allowance. It was set at £40,000 for the 2014/15 tax year.

You can contribute more than the Annual Allowance to your pension, if your earnings support it, but this will trigger a charge that has the effect of clawing back the tax-relief received.

The Annual Allowance applies to a period of time – normally 12 months – called a pension input period. In the past, pension input periods haven’t been aligned with the tax year and their exact timing depended on when you set up your pension. But this is changing and HMRC is in the process of aligning pension input periods with the tax year to simplify things.  

Unfortunately this means that in the short term things are more complicated and further details of the transitional period are explained here.

The new pension freedoms allow you to access the money in your pension pot from the age of 55 and there are now a wider range of options as to what you can do with it. The options now available are: 

  • Annuity
  • Flexi-access drawdown
  • Cash lump sums 

You can’t access your pension pot before the age of 55, unless you’re in ill-health.

If you’ve taken any of your  pension benefits flexibly from the age of 55 and still want to continue making pension contributions, then your Annual Allowance may be reduced from £40,000 to £10,000 and so it’s worth considering any withdrawals very carefully.

The £10,000 allowance only applies to money purchase pension contributions. People who trigger this will still have an alternative annual allowance that they can use for defined benefit pension accrual.

Individual Savings Accounts

Individual Savings Accounts, commonly known as ISAs, are another popular way of saving money for retirement. For the 2015/16 tax year you can put a maximum of £15,240 into an ISA and this can be in the form of cash, stocks and shares or a mixture of the two.

There is no income tax payable on the interest you earn from the investments within an ISA or capital gains tax on any growth in the value of your stocks and shares. But dividends come with a non-refundable 10% tax credit. There is no tax to pay on the money you take out of an ISA and you can withdraw funds at any time making them very flexible. But there might be a penalty for some contracts.

ISAs and pensions each offer savers something different and so it makes sense to weigh up their respective pros and cons in regard to your needs. Many people use a mixture of both when planning for retirement and this blended approach may be something you wish to consider. 

Buy-to-let 

A lot of people also chose to invest in property when planning for retirement. But before you go down this road there are a few things to think about. The first is the cost associated with any buy-to-let investment and it’s important to make sure that you consider all of the fees and charges associated with buying and owning a rental property so that you get an accurate idea of any potential return.

Calculations should also cover the fact that there’ll be income tax to pay on profits from the rental business and capital gains tax to pay if the value of the property has increased by the time you come to sell it.

In his recent Autumn Statement Chancellor George Osborne announced that buy-to-let properties bought after 31 March 2016 will incur an additional 3% stamp duty charge and so this’ll also need to be factored into your considerations.

It’s vital to remember that there’s no guarantee you’ll find a tenant and that during any void periods you won’t receive rent. If there’s a mortgage on the buy-to-let property that means you’ll have to find the money to pay for it yourself.

If you decide to sell, you’ll also have to allow time to find a buyer and if you need money quickly you won’t be able to convert your bricks and mortar into cash overnight.

Making the most appropriate choices on how you save for your retirement will help you reach your financial goals and if you’re in any doubt about the options you have then getting advice from a financial adviser will help.