Types of Retirement Savings Accounts

There are a number of ways for UK investors to save for retirement. Individuals may expect pension benefits or income from investments or retirement savings accounts. It is important to understand what investing and savings options are available for you. Your retirement plan likely needs to include ways to generate income. Your State pension benefits or expected employer pension benefits may not provide enough income for your retirement lifestyle.

Understanding how common pensions and retirement accounts work is a good initial step in the retirement planning process. From there, evaluating your expected income from these sources and how it stacks up to expected expenses is next.

Pension Funds

Many UK investors have access to pensions. These may include the State Pension, workplace pensions, or a personal pension plan. Although pension benefits may be an important or even principal portion of your expected retirement income, not all individuals can rely solely on pension benefits. It is important to take time to estimate expected benefits, consider when you can take them, and how they might change over time.

• State Pension: If your National Insurance Contributions qualify you to receive the State Pension, you can expect a guaranteed income. This income begins at a certain retirement age, and may increase each year.
• You can check your expected State Pension benefit on the UK government’s website.^[i]
• Workplace pension: You may have access to a workplace pension scheme through your employer. Depending on your employer’s specific scheme, and other qualifications, both you and your employer may contribute to your workplace pension.
• The two primary types of workplace pensions are defined contribution and defined benefit—examined in more detail in the sections below.
• Personal Pension
• Personal pension accounts, such as self-invested personal pensions (SIPPs) or stakeholder pensions, can offer individuals more flexibility in investing.
• Stakeholder pension accounts are required to meet certain standards set by the UK government, and may either be set up by an employer or the individual.
• SIPPs can offer significant investing flexibility for individuals. Many investment options are available, although availability may vary by provider. Additionally, in most cases SIPPs can be managed by an advisor.

Defined Benefit Plans

Defined benefit schemes are workplace pensions that pay a guaranteed benefit based on several factors. These factors can include the length of time you have been a member of the scheme, rate of accrual and salary information. Although these scheme benefits are guaranteed, they may not necessarily cover all of your income needs in retirement. Therefore, it can be important to estimate your benefit, and how that benefit can change.

The scheme provider should be able to provide you with a benefit statement each year, which you can use to estimate your expected benefit. For this type of scheme, the earliest age can depend on the particular scheme’s rules. Keep in mind that if you elect to take benefits earlier, you may have a reduced amount. Finally, these benefits are taxable, but you may be able to take a tax-free pension commencement lump sum.

Defined Contribution Plans

Defined contribution schemes do not provide a guaranteed benefit. Instead, these plans provide a benefit that varies based upon the contribution amounts and the performance of selected investments.

These plans usually require the individual to select underlying investments. It is important for you to understand and identify the investments best suited for your needs. This selection will directly affect the benefit amount you receive. You may be able to take up to 25% of the pension pot as a tax-free lump sum.

ISAs

Individual Savings Accounts (ISAs) are a tax-efficient way to save money. Some common types of ISAs include:

• Cash ISAs are primarily used to hold cash.
• Stock and shares ISAs can be used for a variety of qualifying investments, including cash.
• Lifetime ISAs are used for retirement saving or for the purchase of a first home.
• Innovative Finance ISAs include loans to individuals or businesses without a bank, or purchases of a businesses’ debt.
• Junior ISAs are only available for children under the age of 18.

Lifetime ISAs are savings accounts intended specifically for retirement savings or first home purchases. However, you can use other savings accounts to save or invest for retirement income needs. Lifetime ISAs provide several advantages for retirement savings, including a government match up to a certain limit and potential tax-free withdrawals.^[ii] However, opening a Lifetime ISA is limited to those between the age of 18 and 40, and you cannot contribute after the age of 50. If you do not qualify to open a Lifetime ISA, you may consider using a Cash ISA or Stock and Shares ISA as a tax-efficient way to save some money for retirement.

Taxable Accounts

Taxable investment accounts can also be a useful option for investors’ retirement plans. These accounts do not provide any tax relief, but they can offer more flexibility. Taxable investment accounts do not have limits on contribution amounts or withdrawals, and they can offer a wider variety of investment options than many pensions or ISAs. You may be able to have a financial professional manage your accounts, or manage them yourself.

Planning Considerations

How can you determine what retirement savings accounts and investment options are best for your retirement plan? Consider some of the following questions:

• What is the minimum age for withdrawals without penalty? If you plan to retire earlier, you may want to have a source of retirement income that does not penalise for early withdrawals.
• What are the tax consequences? When contributing to retirement savings, tax relief can be helpful to your overall financial situation.
• Do you have control over some or all of the investment decisions in your accounts? If so, have you selected the appropriate asset allocation, or mix of securities, for your income needs?
• Are you solely relying on the State pension for retirement income? You may need to consider additional income sources to fully meet your needs.

Fisher Investments UK

A financial professional may be able to provide useful advice for your situation. Whether you are considering investment management in an account, or simply need help with your personal retirement plan, Fisher Investments UK may be able to help. To learn more, contact us today.

^[i] Source: UK Government website, as of 24/06/2019. https://www.gov.uk/check-state-pension

^[ii] Source: The Money Advice Service, as of 24/06/2019. https://www.moneyadviceservice.org.uk/en/articles/a-guide-to-lifetime-isas