If you’re employed, the pension choice is more straightforward than if you work for yourself. But that doesn’t mean you shouldn’t bother saving for your retirement. So where should you start?
Find out what the state will provide
Before you can work out how much you need your private retirement savings to provide you should find out what the state may pay you. I say ‘may’ because state pensions are in such a state of flux that it’s impossible to be precise.
1. Get a state pension statement. This is designed to show you how much state pension you’ve already built up. I’ve written an article that explains clearly how to get a state pension statement.
SAVVY TIP: If you’re self employed you’ll only be entitled to the basic state pension under the state pension system that existed up until April 6th 2016. For state pension you’ve built up since then, you’ll be entitled to the new ‘flat rate’ pension.
Start saving for your retirement
Although most people think retirement savings = pensions, there are more choices. Tom McPhail of independent financial advisers Hargreaves Lansdown says that a pension may not be the best option every time:
– If you’re in your fifties and pay tax at the basic rate: you may be better off saving in an ISA (individual savings account) rather than using a pension. This is because you won’t get the advantage of tax relief at the higher rate.
SAVVY TIP: Tax relief just means that you get extra money paid into your pension by the government. If you’re a basic rate taxpayer and you pay £100 into your pension, once tax relief has been added it works out at £125. If you’re a 40% taxpayer and pay £100 in, you’ll end up with £166.67 (basic rate tax relief is normally added in and you reclaim the rest through your tax return).
– If you’re in your thirties and are a higher rate taxpayer: you’re probably better off — from a tax efficiency point of view — saving in a pension.
SAVVY TIP: Tom McPhail adds that the more uncertain your financial position is, the older you are and the fewer long term savings you have, the better off you are saving into an ISA. You can always transfer the money into a pension later on.
What type of pension?
With all pensions you cannot get access to your money before your 55th birthday so you have to be comfortable tying money up for that length of time. If you are, the options are:
1. Stakeholder pension: This is a straightforward and relatively low cost pension. Charges are capped to 1.5% a year for the first ten years and 1% year after that. You can stop and start contributions and switch to different providers without penalty. However, charges for all pensions have come down in recent years and you can probably get a personal pension that charges considerably less than this cap.
– Personal pension: Here the charges aren’t limited as they are with stakeholder pensions. You typically pay up to 1% a year in charges if you invest in the pension company’s own funds and between 0.2% and 1.2% a year on top if you invest in ‘external’ funds, which are funds managed by investment companies (such as Fidelity, Invesco or State Street). Some pension companies are much more competitive than others.
SAVVY TIP: The advantage of a personal pension is that you normally get access to a much wider range of funds than if you invest in a stakeholder pension.
– SIPP (self invested personal pension): This gives you more control over where your money is invested but it’s not for everyone. The costs can add up and you may find you’re paying extra charges for things you don’t need.
SAVVY TIP: Anna Sofat of independent financial advisers Addidi says that a low cost or hybrid SIPP can give you access to a wide range of funds for less than a personal pension.
Do your research
In an ideal world pensions would be a doddle to sort out but, sadly it’s a bit more complex than that. But don’t let that put you off.
1. Take advice if you want professional help with sorting out your pension. If you’d prefer to talk to an independent financial adviser, there’s lots of information on how to find one on this website in the section called Financial advice and information.
2. Get information from the independent and free-to-use Pensions Advisory Service. There’s lots of information on its website and you can also ring the service on 0300 123 1047
3. Compare costs and charges. Although pension charges are generally much lower than they were a decade ago, some providers charge more than others.
SAVVY TIP: Anna Sofat says that you wouldn’t expect to get a high quality dress for a few pounds and some companies that charge more do deliver, but not all do: “The problem is that there are plenty of mediocre funds that charge the same as those that really do add value.”
4. Check the financial strength and service levels. While charges are important, they’re not the only factor you should take into account. You also need a company that’s financially strong because you want to know it will be around for many years to come. Service levels are important as well.
SAVVY TIP: Look at pension providers’ websites for information about their financial rating (strength) and ringing the company’s call centre direct to check out their levels of service. If they make mistakes when dealing with a basic enquiry, beware!
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