Financial planning is essential. Life is long, and you must make sure your long-term future is as comfortable as it possibly can be.
You might have an employer or workplace pension, a private pension, or a personal pension such as a Self-Invested Personal Pension (also known as a SIPP). While a pension is a great way to save for your retirement, you can also consider other ways of saving for the future, such as investing.
You might already have some input into how your pension is invested, especially if you have a personal or stakeholder pension, but what are your other options?
What Other Options Do I Have?
Personal pension options such as SIPPs may provide you with some control over how your money is invested, but this is often limited in scope.
Pension providers often make your decision very simple, with a choice between a handful of fixed investment strategies. Most pension schemes, such as the workplace pension, provide you with less flexibility. Meanwhile, your employer will often have you enrolled in something called a “default fund”.
While pensions provide certain tax advantages, they are, like any investment, not risk-free. Even workplace pensions, which are exempt from income tax and include a contribution from your employer, are invested in the stock market in some capacity.
If you decide to invest beyond your pension, you have plenty of options. You might consider putting some money into an ISA – a low-risk savings account with tax benefits – or maybe looking at playing the stock market yourself.
You could put some money into funds, which provide you with less direct control over your money and a diverse portfolio of investments. If your pension already provides you with a good amount of security for the future, you could even consider some higher-risk investments. These might include options investing, venture capital or high-yield bonds.
Is It Better to “Top Up” My Pension, or Should I Invest?
A lot of people decide that they will invest additional disposable income into their pension by “topping it up”. This may mean increasing the amount your employer takes from your salary each month or choosing to add funds directly through your pension provider.
While you can benefit in the long term from topping up your pension, this may not be the most lucrative way for you to use any additional funds.
Let’s say your standard 4% pension contribution works out at around £200 per month. You could choose to double this to 8% – £400 per month – but you might want to consider investing the further £200 per month elsewhere.
This might mean investing in the stock market, choosing funds, or maybe even property. For example, you might want to pay off your mortgage more quickly or invest in a new property altogether.
You might consider doing this simply because having your investments spread more widely creates greater diversity in your portfolio. This can provide more security in the case of a market downturn or crash.
However, while investing outside of your pension may mean making higher-risk decisions, if these pay off, the return could be much higher.
How much you should put into your pension and whether you should top it up will depend on your investment strategy, your circumstances, and your attitude towards risk.
Is Now A Good Time to Invest in My Pension?
In April 2019, the UK government changed the laws surrounding auto-enrolment workplace pensions. The minimum contributions under the new scheme see the employee contribute 4% of their monthly salary, plus a 3% contribution from their employer and a 1% contribution from the government. This works out at 8% in total.
The state of the market is just one factor you should consider when it comes to your pension. The government’s renewed focus on more significant pension contributions from employer and employee alike means that it is a favourable time for workplace pensions. Pensions also provide you with tax relief opportunities, which means that it can be a way of saving more money in the longer term.
However, you will want to consider your current lifestyle and savings portfolio. Diversity is a vital factor to consider when it comes to securing your investments against risk. You may also want to have more control over your money and how it is invested.
What Can I Do With My Pension?
Once your money is invested into a pension, you cannot withdraw it until you reach the age of 55. At this point, you can either withdraw the money or use it to make an agreement with an insurance company for something called an “annuity” – regular income for the rest of your life.
If you choose to withdraw the lump sum in your “pension pot”, you will not pay any tax on the first 25%. While there is no requirement to buy an annuity, you’re also not required to use your entire pension to buy it. This means you can take your tax-free 25% and still receive an income in exchange for the remaining 75%.
You can also continue to invest in your pension – as many people will not retire until after they are 55 – or withdraw as much or as little of the money as you like to invest. The government introduced pension freedoms in 2015, which revoked several older rules about how and when you could access your funds.
Whether or not you’re enrolled in a workplace pension, a private pension, a personal pension or choose not to have one at all, it’s an important decision to make when it comes to your financial future.
How you treat your pension and the money in it will depend on your financial situation, your occupation, your lifestyle, and your appetite for risk. There are, however, many options both within and beyond investing in your pension for those who seek to plan ahead.