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Five alternative ways to make your pension work harder

Written by: Andrew Megson
The introduction of the pension freedoms in 2015 brought with it a greater choice of products, schemes, accounts and investments available to pension savers than ever before.

Prior to the reforms five years ago, many people devised their pension plans in exactly the same way: take out 25% as a tax-free lump sum upon reaching the age of retirement, then use the remaining 75% to purchase an annuity, which guarantees a fixed income for life. Whether it was the option that suited them best or not, most individuals seemed content to stick with the status quo.

Yet the reforms armed pension savers with more autonomy over their financial strategies and added flexibility to access their pension pot at the age of 55. So radical have the changes been, that they have prompted a much wider change in behaviours for those preparing for retirement.

Today, particularly as annuity rates are currently held at historic lows, Brits are keen to seek out new options to make better returns on their investments. Indeed, in a recent survey commissioned by My Pension Expert of over 500 full-time workers in the UK over the age of 40, a fifth (19%) said they expect the majority of their retirement to be funded by alternative investments, such as investments or ISAs, rather than traditional pension schemes.

In the face of increasingly diverse pension investments, the question is this: how do you find the best retirement finance strategy?

Here are some tips:

1) Diversifying investments – the antidote to market instability?

Our study found that many people have already invested into alternatives outside of traditional schemes in preparation for their retirements. The most common are stocks and shares (28% of over-40s in the UK hold this investment as part of a retirement finance strategy), bonds (19%), property investment (18%), and art and classic cars (12%).

Interestingly, Covid-19 appears to have accelerated this trend, with many Brits having seen the value of their pension pots fluctuate or fall in the face of the economic upheaval caused by the pandemic. According to My Pension Expert’s survey, 17% of over-40s have withdrawn part or all of their funds from a pension scheme in 2020 because it was losing money, while 22% have sought advice about diversifying their investments this year.

However, it is important to remember that a diverse investment strategy will not be right for everyone when planning for retirement. It will depend on one’s financial circumstances, appetite for risk, and ability to make sound investments outside of the traditional pension market.

2) Defer taking your state pension

When individuals reach the state retirement age, they have the choice either to start claiming their state pension straight away or to hold off doing so.

There are many reasons why someone might decide to wait. And one potential benefit is that by putting their state pension on hold for a minimum of nine weeks, it is possible for savers to receive extra income.

By every nine weeks deferred, payments will increase by 1%. However, this will depend on a person’s state pension age.

3) Consider ISAs

For other pension-planners, ISAs (individual savings account) or lifetime ISAs (LISAs) might be a positive addition to supplement their pension pot.

In short, ISAs are a tax-friendly savings accounts, which allow individuals to invest an allowance of up to £20,000 tax-free. This is unlike a standard pension, where providers can claim back tax on their contributions, and only 25% can be withdrawn as a tax-free lump sum.

What’s more, depending on the particular financial product chosen, ISAs are relatively risk-free, unless a saver opts to invest in stocks and shares, which will fluctuate according to market instability.

Unlike traditional pensions which can only be accessed at the age of retirement (currently age 55), most ISAs can be accessed at any time. This is particularly useful in times of financial hardship, as many individuals will be on the lookout for financial products offering greater flexibility. As such, ISAs allow savers to ease temporary cashflow issues and fund emergency expenses without any tax penalties.

LISAs, meanwhile, can only be set up by those aged between 18 and 39. Introduced in 2017, they allow account holders to deposit up to £4,000 per tax year, with the government contributing a bonus 25% on top of this – so, if an individual deposits £4,000 a year, the state will add an extra £1,000.

4) Track down old pension pots

This might seem like an obvious point, but one of the best ways for someone to improve the state of their retirement funds is to ensure they keep tabs on where all their pension pots are.

For many people across the UK, it is likely they will hold numerous different jobs throughout the course of their career. We found that 40% of over-40s have multiple pension pots from different employers. Notably, as many as 25% admit to losing track of the different pension schemes they have savings in.

It supports data from the government, which estimates that there is approximately £400 million in unclaimed pension savings in the UK.

That’s why ensuring your retirement savings are well managed and closely monitored is so important. Not only will it make sure there is no unclaimed money, it will also help people make better decisions as to where they should invest or save this money.

You can track down old pension pots with the help of an independent financial advisory service, or by using the government’s free pension tracing service.

5) Seek expert advice

There is no such thing as a one-size-fits all pension plan. Now more than ever, people save for retirement in very different ways.

Consequently, people should not underestimate the worth of seeking independent financial advice. Every individual will have different needs, and as such, their appetite for risk will vary. By seeking counsel, pension savers will be able to optimise their retirement savings plan, without making any questionable compromises.

Ultimately, just like all important decisions regarding retirement finances, individuals should ask themselves whether they can afford not to seek independent advice – especially in uncertain, turbulent times like these.

Andrew Megson is executive chairman of retirement income specialist, My Pension Expert

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