How to Choose a Pension Scheme

Having made the decision to make payments into a pension plan, you will be faced with the choice of what type of pension you want to pay into. The choice may be dictated by the circumstances of your employment, for the first type of pension that you should consider is on that is run by your employer.

Workplace pensions

A pension scheme that is accessed through your employer is usually the best type. Most such schemes will benefit from an employer contribution, and some of these will be on a ‘matched basis’, which simply means what you put in, so, too, will your employer. You will also benefit from the tax relief on your payments, having the effect that the taxman is paying into your scheme also.

The new workplace pensions that are being phased in from October 2012 through to September 2018 will benefit from statutory employer payments. By 2018, the net effect of your contributions, the employer contributions, and the tax relief on your payments will be to double the amount of money you pay into the scheme.

However, there are employer based pension schemes to which the employer does not contribute. Whilst these may not be as advantageous as the schemes into which the employer contributes, they may have other valuable benefits such as death-in-service payments or pension guarantees.

Of course, another benefit of enrolling in a workplace scheme is that payments are taken direct from your salary, so no separate arrangements have to be made.

One of the main reasons for opting for a personal pension instead of an employer’s scheme is on the grounds of cost. It is possible that charges within a personal pension will be lower than in an employer scheme.

Personal Pensions

If you don’t have access to a workplace pension, for example your employer does not have one or you are self-employed, then you will need to make your own arrangements. There are numerous options when setting up a personal pension and many considerations to take into account when selecting the best pension for you.

Some pensions will have restrictions on transfers, which may become an issue should you want to transfer to another provider in later life. Or there may be penalty clauses that affect the fund value on such a transfer.

Others will have high charges, or a limited fund choice for investment. The costs associated with the management of your funds will directly impact upon on-going values and the final amount available to purchase an income generating annuity when you retire.

You should also consider what benefits will be paid to your beneficiaries should you die before you retire.

Within the heading of personal pensions, you will have three types of pensions to select from:

A personal pension is funded by regular payments, and will have a wide range of standard funds from which to choose. Different providers will levy different rates of charges, and the different funds available may also have different management charges levied by them. There may be restrictions on the minimum contribution payable into such a scheme.

A stakeholder pension benefits from generally lower costs than a standard personal pension, and has flexible minimum contributions to suit the pockets of the lower paid. All stakeholder pensions must offer a default fund for those investors that do not want to make investment decisions. Such a fund usually works on a life-styling basis, cutting risk as you move closer to retirement in an effort to protect the fund built up through the lifetime of contributions.

Finally, a Self-Invested Pension Plan (SIPP) allows the maximum amount of flexibility as to investments held within it. This type of plan is usually best for those with a larger pension fund, or who wish to exercise greater control over their pension investments.

Investing your pension contributions

Once you have selected your pension type, and the pension provider, you will be required to select the investments within the pension. These are normally by way of a range of funds (though in a SIPP it is possible to make other investments, such as commercial property). Each fund will have a different investment profile.

Some funds will offer international investments, others domestic assets, and some will include a mix of both. Your attitude to risk will determine the mix of assets you want to hold, from the cautious cash through government and corporate bonds, to property and equities.

Dependent upon your investment profile, you may want a pension scheme that has a very wide choice of funds to select from or prefer a pension scheme with lower charges and a lifestyle fund option.

Making the choice

Internet access has made self-selection of pension schemes more accessible. However, it should be remembered that a pension is a long term commitment to investing toward a goal that may be decades away.

While direct selection is perfectly possible, pension investment is an area that can be enhanced by using a good financial advisor. He will have knowledge of the market place, understand the effects of charges on pension schemes, and be able to advice on the funds available to you.

Moving forward from initial investment, he will then be able to assess your changing attitude to risk as your life progresses and make recommendations on fund choice accordingly.

In summary, when choosing a pension scheme you should;

• · Firstly consider your employer’s scheme;
• · Make sure the charges on the scheme are low;
• · Understand the investments in your pension, and how they work;
• · Remember that you can now invest into more than one scheme should you wish to do so;
• · Seek advice from a good financial advisor.