Alongside your state pension and possibly any Occupational Pension Scheme you are a member of, a private pension plan should be considered an integral part of the retirement planning process. Gone are the days when individuals could rely on the state, and employer, to provide a sufficient income in retirement.
Now, a private pension plan is essential however, through a combination of lack of understanding and delaying decisions because retirement is far off and quite often there are deemed to be more immediate financial commitments, many individuals are suffering as they have delayed making essential decisions on retirement planning. However, private pension UK providers offer far more flexible options nowdays making it an easier task to plan for your retirement.
The retirement planning process can be segmented into the following order
Selecting the right private pension plan for you
- By selecting either a personal pension, stakeholder pension or SIPP
- Selecting the right private pensions UK provider
- Selecting the right investment funds
- Choosing the right contribution levels and ensuring you are claiming your tax relief on contributions
- Considering options such as salary sacrifice
Options at Retirement
- Whether to choose an annuity
- Or possibly a pension drawdown plan
- Deciding on taking your lump sum pension of up to 25%, or using the entire pension to provide an income
Comparing Private Pensions and other forms of retirement planning
Although private pension arrangements are the most tax efficient form of retirement planning, there are other options available
- Individual Savings Accounts
- Non-ISA investments such as Investment Bonds, EISs and VCTs
- Your own personal business
- Property – Residential and commercial
Private Pension advantages
- Tax relief on contributions at your nominal rate of income tax
- Tax efficient growth within the pension plan
- Tax free lump sum up to 25% of pension value
- The fact that benefits are inaccessible until retirement helps plundering of your pension fund until that time
- Potential death benefits such as your pension fund being free from inheritance tax
Private Pension disadvantages
- No access to benefits until age 55
- Income from a pension is taxable at your nominal personal rate of tax
- Limits on income available from your pension in most circumstances
- The possible effect of pension credit
How to find the private pension for you
So where do you start in searching for the right private pension for you? First of all you should check to see what pension scheme your employer offers. It will soon be mandatory for all employers to offer some sort of pension scheme however, just because there is an employer’s scheme, it doesn’t necessary mean that it will be the right option for you.
Most employers will contribute into an employer’s pension scheme and that should be taken advantage of. What you need to do is check to see what sort of pension is on offer, mainly what the charges are and what fund selection is available for your contributions. In comparison to private pensions, the fund selection element of employer’s schemes is where you are likely to be disadvantaged. Although employer’s schemes tend to have low costs there are usually a limited number of funds available. Furthermore, the funds available tend to be from the same investment company. This could potentially be a major disadvantage because of an investment company are not attracting the best fund managers this can have an adverse effect on a lot of their funds management and subsequent performance.
Also, a lot of individuals prefer to keep their retirement savings separate from their employment. There may be various reasons for this, possibly a distrust of their employer, or maybe the intention is to leave their employer at some point in the future. This is another main advantage of a private pension as no matter what your employment is, or how often you change employment, you can always stop and start a private pension with ease.
Using a financial adviser or ‘do it yourself’?
It used to be that when someone wanted to set up a private pension they used to go to their bank or an IFA. With more and more people having less trust in their bank this option is not as popular as it used to be. A lot of people are of the view that bank staff are poorly trained, or perhaps target driven, and this is another reason why this option in selecting the right private pension is becoming less popular.
The IFA route has been growing in popularity however, this option also may not suit many individuals as there seems to be a distrust with this profession, especially after the past endowment scandal over the last decade. It has to be noted that the Financial Services Authority has taken great steps in cleaning up the IFA industry with increased regulation and mandatory examinations for advisers. No longer should an IFA be seen as a salesman, but that of one who has sufficient technical knowledge and credibility to be trusted with your retirement planning.
That leaves us with the last option of going direct and ‘doing it yourself’. All major private pension UK providers have a massive web presence. With help of such sites as privatepension.org and visiting different pension provider’s sites on the pensions that they offer, you can arm yourself with enough knowledge to make the right decision.
Selecting a stakeholder pension or a private pension
No matter which choice you make with how to source the right pension for you, you will still have the decision on if you wish to contribute into a personal pension or a stakeholder pension. This website goes into some detail on these different options but as a short recap of the differences between the two is that stakeholder pension’s benefit from UK government regulation. This means that they are maximum charges that the pension provider will be allowed to charge (1.50% per annum for the first ten years, this drops to 1.00% after this period) and also that a stakeholder pension has to accept minimum contributions of £25.
A personal pension however, will have a much larger fund choice available, usually 100+ funds in comparison to the average stakeholder offering of 25 funds. Although personal pensions tend to have greater annual charges, in the last year there has been a notable drop in these charges.
What to do now?
Browse this site for all the information that you require as there is every aspect of private pensions covered on this site. Once you feel that you have sufficient knowledge on the subject then contact different pension providers, and perhaps an IFA on the pension advice and private pensions that they offer. That way you are likely to make the best choice with regards to the private pension that best suits your needs.