Alternative retirement plans: are pensions my only option?

This communication is for informational purposes only and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, it is subject to change and we are not responsible for any errors or omissions.

For many people, pensions will be the “bread and butter” of a retirement plan. In 2024-25, pensions are still widely regarded as highly tax efficient, helping savers in building long-term wealth. Yet, what are alternatives? How do they compare to pensions?

Below, our financial planners explain some popular “non-pension” income sources that can be used in retirement. We discuss their merits and demerits compared to pensions, highlighting how they could feature in a wider financial plan.

Many of these ideas can be used in conjunction with a pension. They are not necessarily mutually exclusive. If you want to discuss your financial plan with a member of our team in Murcia, please get in touch to arrange a no-obligation financial consultation at our expense:

+34 966 460 407
info@scottsdale.eu

Option 1: ISAs

In 2024-25, a UK tax resident can contribute up to £20,000 in total to ISAs (individual savings accounts). ISAs can be very tax-efficient tools for wealth growth since any capital gains, dividends and interest earned inside them are tax-free.

Over time, an individual maximising their ISA allowance each year could potentially build a sizeable “ISA portfolio” of tax-efficient investments. For instance, if someone contributes £20,000 to their ISAs each tax year for 20 years, they could have £400,000 in savings and investments, which are “shielded” from tax – even setting aside any returns (assuming tax rules and ISA allowances do not change over this time).

The Lifetime ISA can be a particularly useful retirement planning tool. Each year, an individual can contribute up to £4,000 to their Lifetime ISA. The government will provide a “boost top-up” of 25% (capped at £1,000 per year). The funds can then be withdrawn after the Lifetime ISA owner turns 60.

Whilst ISAs can be very tax-efficient and have fewer age restrictions than pensions (regarding withdrawals), the assets inside them are not typically exempt from inheritance tax (IHT). The £20,000 annual contribution limit can also be too constraining for many savers who might want to contribute more.

Option 2: Property

Many people like the idea of owning a small portfolio of flats or houses (e.g., Buy To Let) that can be rented out in retirement. The income could be used to settle any mortgage liabilities, cover maintenance, and retain a “profit” during periods of non-occupancy—i.e., if certain tenants move out of one property, perhaps for work reasons.

Property can be attractive because it is an investment that many people are familiar with. Unlike pensions, it is an asset of bricks and mortar—something tangible that we can see and touch. There is also a common expectation that UK property prices will continue to rise in value in the coming years due to supply constraints amidst rising population growth.

However, property investments often have a high barrier to entry. Few people can afford to buy an additional flat or house outright. Even raising funds for a Buy To Let mortgage is no small task, with the typical up-front lump sum standing at 20-40% in 2024.

There are also diversification risks and liquidity risks associated with property. In other words, if a housing market “crash” happens, your portfolio may be disproportionately affected compared to someone with investments “spread out” in a pension via different asset classes. It may also be difficult to sell certain properties in the future at the desired time or price, depending on market conditions.

Option 3: Venture Capital Schemes

For a minority of investors with a higher risk appetite and a decent “wealth base”, the UK government offers various tax-efficient investment “schemes” in venture capital which could be worth considering. In particular, the Enterprise Investment Scheme (EIS) allows certain investors to invest in early-stage companies whilst enjoying some nice tax advantages.

For instance, EIS allows an investor to claim 30% up-front income tax relief on the value of their EIS investments. Investors can also access loss relief if their EIS investment underperforms or fails. Tax liability that is due on certain capital gains (e.g. from shares disposed of earlier in the tax year) can be “deferred” if the profits are re-invested into EIS-qualifying investments.

Similar schemes to EIS exist such as the Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCTs), each with its own unique features, advantages and drawbacks. The main issues to consider with VC schemes like these are the risk level and the high barrier to entry. Since these schemes typically focus on “younger” companies (e.g. startups), the potential for higher returns is offset by the higher investment risk. Many of the companies seeking funding will ask for significant funds up-front (e.g. £10,000+), which limits their access to wealthier investors and can present difficulties when trying to diversify across many assets and companies.

By contrast, pensions will be more suitable to most retail investors because you can start contributing to a scheme at a low contribution level (e.g. £50 per month). Also, pension schemes typically grant their members access to various funds where their contributions can be “pooled” with other investors and spread out over many companies, markets and sectors.

Invitation

If you are interested in discussing your own financial plan or inheritance tax strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:

+34 966 460 407
info@scottsdale.eu

 

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