Finding the best performing personal pension scheme can be complicated. This guide explains what you need to know to get started.
First the good news: thanks to the wonders of modern medicine we are all living a bit longer.
Now for the bad – this means we’ll need more money to see us through our retirement and, worse still, relatively few of us are making adequate provisions.
The chances are it will take many years to build up a pension pot big enough to see you through our dotage, so the best maxim to live by is: it’s never too soon to get started. Even if you are in your 20s and retirement seems an age away it’s still a good idea to start building your retirement savings.
However, this is a major decision and you’ll need to make sure you’re making the right choice.
Personal pension scheme rules
The rules surrounding pensions are often shifting, so it pays to stay up to date.
The best thing is that any personal pension scheme contributions you make into a pension pot will be liable to tax relief. When you near retirement you may be able to take up to 25% of your pension as a tax free lump sum.
The age at which you can take this sum has recently changed, rising from 50 to 55 in 2010. The retirement age is also on the up to reflect longer lifespan. By 2020 it will be 66 for both men and women, rising to 68 over the next 40 years.
Types of personal pension schemes
While you may have a pension into which you are enrolled through your employer, it's quite possible that you, like most, don't fully understand how it works. A personal pension is somewhat more complex so finding a new pension scheme can be a little intimidating.
A popular option is a stakeholder pension which works in much the same way as other pensions but must conform to a number of requirements as set out by the government such as clearer terms and lower charges.
If you’re dissatisfied with the performance of your current pension, you may decide to take the wheel yourself with a self-invested personal pension – or SIPP.
These allow you to invest in any asset class you like, to select stocks of higher or lower risk, and to manage your pension over a period of time. Because of the extra functionality involved these are often a little more expensive and you do run the risk of running your fund down although you may save on annual management charges.
What to look for?
Whatever type of pension you go for, you will want to tailor the pension to your own requirements. This can be complex so it’s always worth taking extra pension advice if you're at all unsure.
When you take on your pension you may be asked questions such as whether you want to invest in high risk assets or low risk. The higher risk assets generally have the potential for a bigger return, but come with a greater danger of losing your money.
It’s important to remember that when you take a pension you are in effect gambling your money on the success of the shares. The value of these can up down as well as up and many people find themselves looking at a pension which is worth a fraction of what they had hoped so staying realistic is key.
If you don't want to be involved in the day to day management of your pension funds it would be worth finding a personal pension scheme that offers lifestyling. A pension that does this would move your pension savings from higher risk funds to lower risk funds as you approach retirement. The aim would be to maximise growth initially and then protect the amount you've built up as the time nears to draw on it.
You might also find yourself asked if you want to choose an ethical option. If you do this you will invest in assets which meet a certain criteria, such as those which do not invest in unsustainable activities.
The primary concern, though, will be the financial performance as you naturally want a pension fund which will deliver on your financial goals.
The best way to do this is to look at the past performance of the fund. This is not exactly a guarantee, but does give you a good idea of how it has and can perform.
If you want to speak to a qualified pension advisor for advice on what's best for your individual circumstances you just need to fill in this short pension enquiry form.