Whilst pensions are often the focus of retirement savings, it doesn’t have to be the only place you save for post-work life. In fact, many retirees find their income comes from multiple different sources. It can make it complicated to understand your likely financial position in retirement, but it’s also an opportunity to spread risk and have different savings to dip into as it suits you.

If you’re looking for a home for long-term savings with retirement in mind, what are your options? There’s no one-size-fits-all solution to saving. The right option for you will depend on your personal goals, time frames, attitude to risk, and more. However, among the options to consider are:

Cash ISA

If security is a top priority for you, a Cash ISA (Individual Savings Account) may be the right option. Each tax year you can place up to £20,000 in ISA accounts. With a Cash ISA, interest will be paid on your deposits. As your savings are in an ISA, they are tax-efficient, so you won’t need to pay tax on the growth. Interest or cash held outside of an ISA that exceeds your tax-free allowance may be subject to tax. However, interest earned in ISAs is not taxed and does not need to be declared, making it easier to complete tax returns if necessary.

Deposits are secure and are protected up to £85,000 under the Financial Services Compensation Scheme (FSCS), which is underwritten by the Government, per person per authorised bank or building society. If you save into National Savings & Investment (NS&I) products, including ISAs, you are investing directly in the Government and benefit from unlimited protection.

As a result, you don’t have to worry about losing the money you’ve set aside for retirement. However, interest rates are low, and this means your savings will slowly be eroded by inflation, affecting spending power over time. If retirement is still some years off, an alternative option may deliver better returns.

Stocks and Shares ISA

Deposits into a Stocks and Shares ISA will also use up your £20,000 annual ISA allowance. But rather than receiving interest on deposits, your contributions will be invested, and you won’t need to pay tax on the returns delivered. Again, as with Cash ISAs, using an ISA to hold investments means the income and capital gains produced do not need to be declared.

By investing through an ISA, you have the potential to grow your savings further and keep up with or outpace inflation to deliver a greater income in retirement. However, there is investment risk and it’s likely the value of your savings will fluctuate, falling as well as rising over the short term. As a result, it’s usually only advisable to invest if you have a time frame of at least five years, allowing you to ride out short-term dips.

Remember, Stocks and Shares ISAs typically come with several different investment options with various levels of risk. It’s important to pick a profile that suits your attitude to risk and goals.

Lifetime ISA

If you’re aged between 18 and 40, the Lifetime ISA (LISA) is an excellent option for retirement savings. You can place up to £4,000 a year into a LISA, which can either be held in cash to generate interest or invested. The biggest appeal here is the government bonus, which will give a 25% boost. So, put in the maximum amount in a given tax year and you’ll receive an additional £1,000. It’s a boost that can really help you achieve retirement goals.

The key drawback here is the restrictions for withdrawing money. Should you want to make a withdrawal before the age of 60 for a purpose other than buying your first home, you will lose the bonus and some of your own deposits. As a result, it’s not an option if you want the flexibility to dip in and out of savings when needed.

Investment portfolio

Whilst investments can be made through ISAs, a standard investment portfolio can also be used to build up a retirement income. Whether you already use your ISA allowance for other purposes or want greater flexibility, creating an investment portfolio may be the right option for you. As with a Stocks and Shares ISA, it gives you an opportunity to build up your savings faster thanks to returns but does come with some risk. It’s important to manage the volatility you’re exposed to and how this reflects your overall attitude and financial goals.

Another important area to consider is tax. The current system of tax allowances means many investors with a reasonable sized portfolio will not pay tax on their investment returns, even when they are held outside of a Stocks & Shares ISA. However, you should take steps to understand your tax position.

Property

Many people planning for retirement see property as an excellent investment opportunity. This may be a plan to downsize in the future and use the additional capital to fund retirement dreams or you may be considering purchasing a second home or a Buy to Let property. One of the important things to recognise here, as with all investments, is that you can’t guarantee returns. In the past, the property market has boomed and delivered exceptional profits, but that doesn’t mean it will do so again, in fact, property price growth has slowed. You should also factor in the costs associated with property, such as maintenance and repair work if you’re thinking of using it to fund retirement.

Why save for retirement outside of a pension?

Saving for retirement outside of a pension can provide you with more flexibility. Usually, a pension can’t be accessed until the age of 55. If you’re planning a retirement or career break before this, you’ll need other sources of income to do so, for instance. It’s also an opportunity to diversify your long-term savings and help manage risk.

But pensions are valuable too

Whilst saving for retirement outside of a pension may be attractive, it’s crucial to consider the benefits of pensions too. Typically, if you save into a Workplace Pension, you’ll also receive employer contributions and tax relief, as well as hopefully receiving investment returns. As a result, your pension can grow faster. Ideally, saving for retirement outside of a pension shouldn’t mean you don’t use a pension at all, but complement it. If Inheritance Tax (IHT) is a concern, pensions can also prove valuable. The money held within your pension doesn’t form part of your estate and, therefore, doesn’t contribute to IHT allowances.

If greater flexibility or control is what you want, it’s also important to remember that it isn’t just Workplace Pensions that are an option. A Personal Pension or Self-Invested Personal Pensions are also options that may be worth exploring.

Bringing together different sources of income to fund retirement can be difficult. This is where financial planning can help. As you save, it can help you understand how different pots might grow over the years, which option is right for you and potential tax liabilities. Once you reach retirement, it’s a process that can help inform the decisions you need to make, including where to withdraw an income from and the lifestyle you can expect. If this is an area you’d like support with, please contact us.

Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.