Saving for retirement

If you’re employed and eligible, your company will automatically enrol you in their workplace pension scheme, kickstarting your retirement savings promptly.

Your contributions will be deducted from your monthly salary, with additional contributions from your employer, plus tax relief of up to 45% in some circumstances.

You’ll still have the freedom to choose how your funds are invested, allowing you to align with your investment preferences.

Anything above the basic rate of tax must be reclaimed via the individual’s tax return.

Auto-enrolment products are not regulated by the Financial Conduct Authority.

For the self-employed, initiating a pension as you establish your business or career is advisable.

Some self-employed individuals regard their business as their retirement fund, intending to sell it when they choose to retire. However, many are inherently tied to their business, and if they retire, the business holds little residual value.

Consider the scenario where your business serves as your pension, but it faces financial collapse. In such a situation, not only would you lose your livelihood, but you’d also forfeit your retirement savings.

As a self-employed individual, you won’t benefit from an employer contributing to your pension in the same manner.

However, there are still significant tax advantages you shouldn’t overlook. For instance, you’re eligible for tax relief on your pension contributions, up to the lower of the income you pay yourself, or £60,000 per year.

Consulting a financial adviser is the simplest way to begin, as they can assist in launching your plan.

Indeed, there are alternative methods to save for retirement, such as utilising Individual Savings Accounts (ISAs). It’s not necessarily an either/or decision; considering both options is beneficial as they frequently offer distinct flexibilities and advantages that complement each other.

ISAs and pensions represent distinct avenues for saving, catering to a mix of short, medium, and long-term financial objectives when utilised together. Here’s an overview of the key differences between ISAs and pensions:

1. Tax Treatment:
   • ISAs: Contributions to ISAs are made from post-tax income, meaning there’s no tax relief on contributions. However, any interest, dividends, or capital gains earned within an ISA are tax-free.
   • Pensions: Contributions to pensions benefit from tax relief, meaning you receive tax relief on the amount you contribute, subject to certain limits. However, withdrawals from pensions are usually subject to income tax.
2. Access to Funds:
   • ISAs: Funds in an ISA can typically be accessed at any time without penalty, providing flexibility for short-term financial needs.
   • Pensions: Funds in a pension are typically inaccessible until you reach the minimum pension age, currently set at 55 in the UK (subject to change), although there are some exceptions, such as ill health.
3. Contribution Limits:
   • ISAs: There’s an annual contribution limit for ISAs, which is set by the government. For the 2024/25 tax year, the ISA allowance is £20,000.
   • Pensions: There are also limits on pension contributions, although they are generally more generous than ISA limits. The annual allowance for pension contributions can be up to £60,000, but this can be lower for high earners.
4. Employer Contributions:
   • ISAs: There are no employer contributions for ISAs since they are individually owned and managed.
   • Pensions: Workplace pensions often include contributions from both the employee and the employer, making pensions a valuable way to save for retirement.
5. Inheritance Tax (IHT) Considerations:
   • ISAs: ISAs are generally subject to inheritance tax if passed on to beneficiaries upon death, depending on individual circumstances.
   • Pensions: Pensions typically fall outside of your estate for inheritance tax purposes, making them a tax-efficient way to pass wealth on to beneficiaries.

By understanding these differences, and working with an expert financial adviser to plan your saving strategies in a tax-efficient way, aligned to your personal circumstances, you can make informed decisions about how to effectively utilise both ISAs and pensions to meet their financial goals at various stages of life.