The question of saving for retirement is an age-old dilemma, but it has become especially significant over recent decades as improved living standards have seen more people living much longer than ever before.
The bad news is that, really, there is no consistently “right” answer to how you should fund your retirement. The good news is that there are some useful guidelines which can help you to pick the right option or options for you.
The reality is that many people will find themselves saving into a pension whether they like it or not.
People who pay standard National Insurance will effectively be saving into a state pension and people who qualify for auto-enrollment are very likely to find themselves losing out if they opt out, because employers may not offer an alternative option for receiving the money which would have been paid into their pension fund.
The big advantage of pensions is that they tend to be a very tax-efficient form of savings.
The big disadvantage of pensions is that the returns from annuities can be very disappointing and managing drawdown pensions can be so complicated that it is only really worthwhile for those with substantial pension pots.
Paying off your mortgage before your retire is highly desirable from the point of view of reducing your expenses when you are on a lower income, however lowering your outgoings is not the same as generating an income.
Most people will still require some form of cash income to make ends meet in retirement which means that they would either need to find some way of monetizing their existing property (for example by taking in lodgers) or downsize to a lower-priced property and use the profit from the sale of their old one towards generating an income for their retirement (or a combination of both).
These are both reasonable strategies; however, they each bring their own complications. Equity-release schemes in particular can have significant potential drawbacks and anyone considering entering into one is strongly advised to take independent professional advice before making any final decisions.
The 1990s were the decade in which significant numbers of people switched their retirement savings from pension funds to investment property.
There were two main reasons for this, one was a wave of pension-related scandals (of which the two most notorious involved the Mirror newspaper and the Equitable Life Assurance Society) and the other was shrinking returns from annuities.
Although the issues which led to these scandals have largely been addressed (and it is no longer obligatory to buy an annuity), the fact remains that the UK has a very high level of demand for good-quality rental property, which means that property can still be an excellent investment for those looking for a decent level of reliable income.
In addition to the need for residential property, there is also a need for commercial property, especially purpose-built student accommodation and purpose-built retirement accommodation.
Property investment as a pension has also been a hot topic for a little while now and continues to be so, as more and more people see its potential.
Becoming a landlord and investing in either student or residential buy-to-let property can be seen as an attractive investment, especially as certain regions in the UK (for example, Manchester’s ever-growing property market) promote some of the highest rental yields and as these areas continue to grow, so does the demand for property.
The fact that people are living longer means that retirement periods are becoming longer and hence “safe” approaches such as saving into pensions may no longer be sufficient on their own.
This does not necessarily mean that people should abandon them completely, but it does mean that it is often wise to look for ways to generate additional income during retirement.