Other ways to fund my retirement

There are lots of different ways to save for your retirement, but which one works best for you?

We look at the main options, explain how they work and compare them. We’ve given five stars to the most effective options and one to the least.

Back to your options

Tax

Flexibility

Access

Risk & return

5*

On the plus side

The government tops up your contributions with tax relief - the amount depends whether you're a standard rate (20%), higher rate (40%) or additional rate (45%) tax payer.
From the age of 55 you can usually take up to 25% of your pension as a tax-free lump sum.

Note:

Any income you then take is liable to income tax.

4*

On the plus side

You choose how much you pay in subject to HMRC limits. You can start with as little as £16 a month.
You can make changes to your payments, and pay monthly or make one off payments.

You'll have a choice of flexible retirement options to suit your circumstances.

1*

On the plus side

Pensions are long-term investments. The more time they are invested, the more chance they have to grow.

Note:

You won't be able to access your pension until you're 55.

4*

On the plus side

You can choose where you invest your money to suit your attitude to risk.
You can spread your payments across different investments, reducing your exposure to risk.

Note:

Investment value can rise and fall

4*

On the plus side

Any returns you make will be tax-efficient.
You can invest up to £15,000.

3*

On the plus side

You choose how much flexibility you want with investments, payments and withdrawals.

Note:

You may have to sacrifice some potential returns, if flexibility is key for you.

4*

On the plus side

If you pick an ISA with instant access, you'll be able to withdraw money at any time.

Note:

Because it's an investment, it's best to view your ISA as money you won't touch for at least five years, to allow it the opportunity to grow.

4*

On the plus side

You can choose where you invest your money.
You can spread your payments across different investments, reducing your exposure to risk.

Note:

Investment value can rise and fall.

2*

On the plus side

You can offset mortgage interest payments, agent's fees and repair costs against your taxable rental income.

Note:

When you buy the property you're likely to have to pay stamp duty (1% to 7% of its value).
Any profit you make on the rental income will be liable to income tax. You'll need to fill out a self-assessment tax form.
If you sell there may be Capital Gains Tax to pay.

2*

On the plus side

You could increase the rent to earn more money but generally the market will dictate what you can charge.
You could sell the property if you're struggling to keep up with mortgage payments.

Note:

You'll need a cash deposit of at least 10% of the property's value to buy it.
If you take out a mortgage you'll be committed to paying a certain amount each month until its end.
Your income depends on your property being rented and the cost of any ad-hoc repairs.
If you decide to sell the property, it may take longer than you expect.
Your buy-to-let mortgage may state a minimum rental you can charge which may make your property less attractive to prospective tenants.

4*

On the plus side

You'll receive an income as soon as the property is rented, regardless of your age.
You can sell your property at any time or remortgage if you need to release some money.

Note:

You only have access to an income if the property is let and if no ad-hoc repairs are required.
There is currently less flexibility and less availability of buy-to-let mortgages.

3*

On the plus side

If you've done your research, you may get a steady rental income, and make a profit if you then sell the property.

Note:

You may face repair costs and have gaps between tenants.
Property used to be seen as a guaranteed way to make a return. House price volatility makes this less of a certainty.
All your money is invested in one place. There's a risk that it won't perform as expected.

3*

On the plus side

You won't have to pay Capital Gains Tax on the sale of your main home.

Note:

If it's a second home, you may be liable to Capital Gains Tax.
If you then buy a new property you're likely to have to pay stamp duty (1% - 7% of its value).

3*

On the plus side

You own it, so you can decide to sell it when it suits you.

Note:

Property may take longer to sell so you should take this into account when reviewing your investments.
Property used to be seen as a guaranteed way to make a return. House price volatility makes this less of a certainty.
You may have to pay early repayment charges if you sell before the end of your mortgage term.
You still have to live somewhere so you'll need to factor in the cost of downsizing.

3*

On the plus side

You can sell your property at any time.

Note:

If you sell your home, you'll still need to pay for accommodation elsewhere.
Property should be viewed as a long term investment and it may take time for it to sell.

2*

On the plus side

If market conditions are on your side, you may make a significant profit when you sell the property.

Note:

All your money is invested in one place. There's a risk that it won't perform as expected.
Property used to be seen as a guaranteed way to make a return. House price volatility makes this less of a certainty.
Selling and buying property can be expensive, with numerous unexpected costs.

4*

On the plus side

Your National Insurance contributions pay towards your State Pension.

Note:

Any income is liable to income tax. You may have to fill out a self-assessment form.

1*

On the plus side

You can defer the State Pension if you don't want to take it at State Pension age.

Note:

The government controls the amount you receive, when you receive it, and how often.

1*

On the plus side

You can increase the amount you get if you delay taking your pension.

Note:

You won't be able to claim your pension until you're of State Pension age. By 2050 that could be age 69.

1*

On the plus side

The State Pension offers an income for life.

Note:

Currently, the weekly Basic State Pension for a single person is £113.10 and £180.90 for a couple.
An ageing UK population means that in the future more and more people will claim a State Pension, and there's likely to be less to go around.
There's no guarantee that the State will always pay a pension.
The amount you receive will depend on the qualifying contributions you've built up.

2*

On the plus side

You don't pay any tax on estates of less than £325,000 (or £650,000 for a couple).

Note:

Any estate worth more than £325,000 (or £650,000 for a couple) will normally be subject to Inheritance Tax at 40%. Remember, the value of the estate includes property, so it quickly adds up.
To qualify for the £650,000 couple allowance you have to be married or in a civil partnership.

2*

On the plus side

If you do receive money this way, it's normally up to you how you use it.

Note:

You can't be sure when or if you'll receive an inheritance.

1*

On the plus side

What you do with the inheritance will determine the level of access you'll have.

Note:

As you don't know when or if you will receive an inheritance, you cannot guarantee when you will have access to it.

1*

On the plus side

You can choose where you invest your money to suit your attitude to risk.

Note:

You may inherit less than you expect or nothing at all. Remember care for the elderly can be very expensive.
Any estate worth more than £325,000 (or £650,000 for a couple) will normally be subject to Inheritance Tax at 40%. The value of the estate includes property, so it quickly adds up.
The government could change or remove the inheritance limit at any time.

 

Start today

You already know how important it is to plan for your future, so don’t rely solely on property, inheritance or the State. Start paying into a pension as early as you can to help make sure you can fund the retirement you want.

Start paying into a pension

These ratings should not be regarded as financial advice. The right option will depend on individual circumstances. If you are in any doubt speak to a financial adviser. There may be a charge for this.

Laws and tax rules may change in the future. The information here is based on our understanding in July 2014. Your personal circumstances also have an impact on tax treatment.

The value of any investment can go up or down and may be worth less than was paid in. The value of your pension depends on the performance of your investments. These may rise and fall along with markets, and you may get back less than you put in.