The state pension provides a useful safety net but even after the 2017 changes come into effect it will only be around $140 a week. Most people therefore need to make additional arrangements. In some cases this will be a company pension but many firms are now closing their schemes. Otherwise it will be a personal pension, these come in three types, stakeholder, standard and self-invested (SIPPs) and well look at what all these mean.
Remember that money paid into a pension cannot generally be accessed before you reach the age of 55. Anyone under 75 can contribute to a personal pension. When you retire you can take up to 25% of your pension pot as a tax-free lump sum, the rest is used to provide an income for the rest of your life.
The Sky Isn’t the Limit
You can pay up to £50,000 a year into your pension; this includes all pensions so if you have workplace and personal pensions the allowance will be spread across both. The total amount you can amass in your pension pot is £1.5 million over your lifetime – this will fall to £1.25 million from 2014/15.
Tax relief is made on contributions so for a basic rate tax payer a £1,000 contribution costs only £800. Higher rate tax relief is restricted to the amount of tax you pay.
A stakeholder is the simplest form of personal pension. They provide a low-cost, easy-access means of saving but the range of investments available tend to be limited. The maximum the scheme provider can charge for the scheme is 1.5% and they must accept contributions from as little as £20. There’s a maximum annual contribution of £3,600.
A stakeholder pension can’t penalise you for stopping and starting contributions, for moving money in and out or for retiring early.
These offer more investment choices than stakeholder plans, but on the other hand there’s no cap on charges so it’s important to understand what you’ll pay before you sign up. Many standard pension providers have now brought their charges into line with stakeholder plans, capping them at 1.5% for the first ten years.
You’re likely to have to pay charges if you decide to transfer your standard pension to a different plan.
Self-Invested Personal Pensions allow you to pick and choose your own funds so there’s a much wider choice of investment options. They benefit from the same tax relief as other pensions provided the investments are on HMRC’s approved list.
Charges can be higher with SIPPs, you may pay initial set up fees when investing in a fund and there will be annual charges for each investment you hold. Take the time to understand the charges before you sign up. As with other pensions you can take 25% of your SIPP as a lump sum and you can take your pension at any time after the age of 55.
You can often manage your SIPP online and they’re a good choice if you like to take an interest in your investments and see how well they’re doing.
It’s possible to transfer between different personal pension providers. You can also switch between different types of pension – changing your standard pension for a SIPP for example. Again it’s important to check the charges you’re likely to incur when doing this.
You might want to transfer if the performance of your fund has been disappointing or if you’re looking for lower charges. If you’ve built up pension post with several different providers over the years you can use transfers to bring them altogether under one roof to make them easier to manage.
Freelance writer and financial specialist expert Kay Brown recommends reviewing your retirement plans regularly and making pension transfers to see if you can get a better deal.