Broadly speaking there are at least three types of pensions available to UK citizens:
- The state pension
- Workplace pensions
- Personal pensions
The first two are fairly straightforward. Your state pension is money handed to you from the government once you reach your state pension age (which can vary for each person), whilst your workplace pension refers to the pension money you get from your employer.
You might have more than one workplace pension from different jobs throughout your career, and these pensions might also be different in their shape and form (e.g. defined contribution pensions and final salary pensions).
Personal pensions, however, refer to pensions which you set up yourself outside of a company or government scheme. Again, there are different types of personal pension on offer and each one holds its respective advantages and disadvantages.
Whether you need a personal pension – and, if so, which one is right for you – depends on your unique financial goals and situation. In this short guide, we’ll be outlining the main types of personal pension on offer, their various pros and cons, and their broad suitability for different people. Please note that this content is for information purposes only and should not be taken as financial advice. To receive regulated, tailored financial advice please consult an independent financial adviser.
Personal Pensions – Do I Need One?
There are certain situations where setting up a personal pension might be a good idea. For instance, if you are self-employed then you will likely not have access to a workplace pension scheme which both you and your employer would be contributing to. In this situation, having a personal pension can be a good way to help build up a retirement pot for your future.
Personal pensions can also be a good option for those who wish to take a more active role in their investments. Workplace pensions, for instance, can restrict you to certain funds and providers which might not offer you the best deal, wide fund choice or competitive investment management fees. A good example of this might be certain stakeholder pensions, where charges are limited to 1.5% of the fund’ value for the first 10 years. However, bear in mind that certain employers can sometimes offer stakeholder pensions to employees, too!
Personal pensions can also be a good option if you find yourself in an unusual career position. For instance, some teachers living overseas and working at international private schools do not have access to a workplace pension. Having a personal pension available can be useful in this type of scenario. Finally, a personal pension can be a useful “pot” to collate pensions from throughout your career, as you approach retirement.
Different Types of Personal Pension
We have touched on this slightly, already. However, here is a deeper look at some of the different types of personal pensions you might encounter on the market:
- Self-Invested Personal Pension (SIPP). This can be an ideal solution for people who don’t want to rely on their employer for making investment decisions about their pension. You can manage the pension online and decide where you want to commit your money. Examples of investments available via SIPP providers typically include investment trusts, commercial property and offshore funds.
- Stakeholder pension. As mentioned earlier, stakeholder pensions offer you a high degree of investment choice. Their main difference to SIPPs is that stakeholder pensions must adhere to certain rules to qualify as such. For instance, charges are usually capped and there must be a minimum gross contribution of £20.
Now to the advantages and disadvantages of personal pensions…
Pros & Cons of Personal Pensions
Some of the advantages of setting up a personal pension have been mentioned above. They can be a great solution for self-employed people, since they tend to not have access to a workplace pension. They can also be useful for people who have taken time off work to raise children, or who are taking a short career break but want to continue contributing to a pension.
On the other hand, you need to carefully consider whether you should contribute to your workplace pension or a personal pension. In the case of the former, in 2019-20 your employer is legally required to contribute at least 3% of your salary to your pension pot. This effectively amounts to “free money” towards your pension. The latter, however, usually relies solely on your own contributions. So, whilst you might have more investment choice with a personal pension, you need to consider whether your pot would see less overall growth due to lower total contributions.
Personal pensions can be a vital part of your retirement income strategy, depending on your personal circumstances and financial goals. However, they are not necessarily a good option for everybody, so it’s a good idea to weigh up the options with an experienced, qualified financial adviser who understands your needs and what you want to achieve in “life after work”.
Remember, in 2019-20 you are allowed to start accessing your (non-state) pension money from the age of 55. At this point, there are many options open to you regarding what to do with your pension pot, such as committing it to drawdown or buying an annuity. Again, planning well in advance can help you decide whether/where a personal pension could it within your overall financial plan and strategy for retirement.
If you’d like to discuss your pension options with one of our independent financial advisers here at Cedar House, then we’d love to hear from you. Get in touch today to arrange a free, no-commitment consultation with a member of our team. You can reach us on:
020 8366 4400