What are the alternatives to the pension?
If you are unsure if paying into a pension is your best option there are some alternative ways to save for retirement that you might want to consider - although some of them are more realistic than others!
1. Invest in Property
Building a property portfolio while you're working that will then support you when you retire is one alternative to taking investing in a pension.
There are two main approaches you can take:
The first is to gradually move up the property ladder, then downsize to a smaller property when you retire leaving you with a lump sum to live off.
However there are some drawbacks to this plan, property prices, as we've seen over the last couple of years can go up as well as down. You will also have to pay interest on the mortgages you hold rather than earning interest on a pension fund.
The second type of property investment is to build up a buy-to-let portfolio. This is where you keep your own property and take out a buy-to-let mortgage on a second home.
Hopefully, the rent you would earn would cover the cost of the mortgage leaving you essentially with someone else paying the mortgage on the property for you.
There are however again a number of risks to this plan, firstly it assumes that you will always be able to find a suitable tenant who pays the rent on time, secondly as you get older you will either have to sell the property to release the equity or continue to act as a landlord to main the rental income.
2. Use your ISA
From 6th April 2017, everyone can save up to £20,000 a year tax-free between their Investment or cash ISA.
Many view ISA savings as a viable pension alternative and there are definitely some benefits.
Firstly anything you save into an ISA will be easier to access than if you saved into a pension. This means that if you need to access the money in an emergency it would be easier to do so - of course, it may also prove tempting to use the money for other things as well!
Secondly, if you opt for ISAs you'll have complete control over the amount of risk you take as you'll decide the investments that you want to make.
By saving into an ISA you control the level of risk you take with your money - you can also save up to half your tax allowance in cash to reduce the risk even further, although the gains are likely to be comparatively low over the long term.
Thirdly, saving into an ISA means you won't get a guaranteed income throughout retirement, instead of when the money is gone that's it. However, unlike with an annuity, if you die any money left in your ISAs is treated as part of your estate and can be passed on to your loved ones. With pension annuities even if you have only spent a year in retirement and therefore would have plenty left in your pension fund the money be gone.
For many people working in retirement is simply not an option.
However, with many of us spending longer in retirement and employability laws becoming more accommodating, taking the second job is often seen as a good way of supplementing your income.
4. State Pension
Perhaps not strictly an alternative to a pension, as you pay into it already through your National Insurance contributions, but the value of your state pension is definitely worth taking into consideration.
While you can't really rely on the state to fund your retirement in full, you should still make sure to try and maximize your income by fulfilling the necessary contributions required for the full state pension.
The state pension is currently based upon the number of years you've paid National Insurance. The full requirement is 30 qualifying years, although years spent as a parent or full-time carer can also be counted.
If you have only made 20 years contributions when you reach retirement you will be able to claim 20/30 or 2/3rds of the full pension amount, equally if you have 15 years it will be 15/30 or half the full amount.
Secondly, the full state pension age is set to rise to the age of 68 between now and 2046 if you want to check the age at which you can claim a state pension then you can use the DirectGov State Pension calculator