It is a fact of life that we will all, one day, retire. One thing we all want is to have a happy and secure retirement and this includes being financially secure. Generally, when we think about retirement, the word ‘pension’ comes to mind. We may have worked our entire lives and saved into the pension pot but the million dollar question is: ‘will it be enough?’ And is a pension the only method of investment for saving money or are there other investment options and strategies when it comes to saving your money?

There are various types of pensions that are all different types of investments with specific tax rules around them which are advantageous to certain people. So the first place to start is by thinking about which one is best for you.

1.       Basic State Pension

This is a promise from the government to pay you a certain amount each year. You pay in a certain percentage of your income per month through National Insurance and the government pays you a certain amount too.

If you fall short of credits to qualify for the Basic State Pension, you can top it up by buying an annuity. The government is proposing that you will be able to buy an annuity from them rather than from insurance companies which generally provide them.

What is an annuity?

2.       Annuities

Annuities have been around for a long time and are generally provided by insurance companies. There are different types of annuities. If you were to buy life insurance, you would pay the insurance company and on death they would give your spouse or next-of-kin a lump sum. An annuity works the opposite way. You pay the lump sum in full and every year the company will give you a little back. If you live long enough, eventually you will gain back the return in its entirety.

Stuart stated that he would advise against buying an annuity as you are limited with being able to use your money. He talked about SIPs and SSASs as alternative investments.

3.       SIP (Self-Invested Pensions)

A SIP is a Self-Invested Pension which gives you more flexibility with your money. Esseentially, it is provided by an independent pension trustee offering you an investment and you can withdraw from that investment within the legislation that the government allows.

Generally, people with businesses use SIPs because you can rent from your pension. So you cannot put your mortgage into it but can put business assets into it.

The other benefit with a SIP is that when you get to retirement, you do not have to buy an annuity and can ‘drawdown’.

EXAMPLE: Imagine you have a tank of water in your loft. The tank is filled to the top. You then decide you need some money from it. You can turn the tap on and off according to how much you need and when. With an annuity, you cannot do this.

4.       SSAS (Small Self-Administrated Scheme)

A Small Self-Administrated Scheme (SSAS) is another version of a SIP but includes different legislation to borrow from than pension. Generally, you can take money out of a SSAS if you have set-up a business. For example, if you need to buy a property or assets for the business but don’t want to borrow from the bank, you can use the money in your SSAS to fund it.

One of the benefits of this is that you can legitimately reduce corporation tax by moving the money into your ownership.

5.       Bonds

There are two types of bonds: government and corporate.

GILT – this is where you lend money to the government and they give you a return for it. The risk with this is that the bond value can rise or fall but the point is to sell it for a capital gain.

Corporate – this works the same way as a government bond but instead your bonds are with a company! This is riskier than a government bond as the company could go bust but a government won’t!

6.       Shares

This is where you buy into a company. For example, let’s take Vodafone. They may have one million shares and they may be worth x amount. The amount of shares plus the value of the company equates to the value of the shares.

The FTSE100 includes the top one hundred companies on the market.

Happy savings!