Monthly Archives: April 2012
What are the alternatives to a pension? You may not trust a private pension to give you the future income you need, or you may be looking around for other assets that you could use to give you extra income in retirement. Whatever your circumstances, it may not be always beneficial to put all your eggs in one pensions basket. Instead, it may be sensible to diversify your retirement planning and look for alternatives.
In the UK the big advantage of a pension is that the contributions are tax-free. Therefore an obvious alternative is an ISA or Individual Savings Account, which offers similar tax benefits, except that it is the income and not the contributions that are tax free.
An ISA is a savings wrapper, which enables the saver to invest an allowance of around £10000 each year in a range of savings products such as savings accounts, shares, bonds, or unit trusts etc. The big advantage is that any gains or income from the ISA investment will be tax free.
It is estimated, that you could become an ISA millionaire in 28 years if you were to save the maximum ISA allowance each year. This calculation benefits from the miracle of compound interest, and is based on an underlying compound growth rate of 6%. Then when you decide to retire, you could instead of continuing to invest, take out £60,000 a year as a tax free income, and not even touch your £1m.
Property is another alternative worth considering. Many of the baby boomer generation who are retiring now, will have seen big gains on their property purchases over the past forty years. Current retirees can use this money locked up in their property, either by trading down to a smaller house or via equity release.