How to set up a personal pension
Amid increasing longevity, growing uncertainty over the future of the state pension and the increasing inaccessiblity of generous employee final-salary pensions, it's becoming more important than ever to take a degree of responsibility for how you fund your retirement.
So if you want to maintain your lifestyle in retirement and you can't rely on a generous scheme from your employer, you should consider starting a private pension. However, choosing the right plan is one of the biggest financial decisions you'll make, and there is a bewildering choice of options.
Start as soon as possible. Even if you think you can't put very much away at the moment, or you feel that retirement is too far away to worry about, it's important to start building up your pension pot as soon as you can. Compound interest means that small amounts put into your pension fund earlier in life will work harder for you and grow more strongly than larger amounts closer to retirement. You can always increase your payments or make additional contributions if your financial situation improves.
Shop around and gather information. Pensions are a complex financial product, so it's vital to have all the information you need to hand before you make your decision. While a lot will depend on your personal circumstances, you can compare pensions by checking the key facts document that each provider is obliged by law to provide. Tools like the stakeholder pension decision trees on Moneymadeclear.org.uk, the website of the Consumer Financial Education Body, can help you to find out what might be the best choices for your pension arrangements.
Calculate how much you can save. If you join a scheme you might find yourself committed to regular payments. Draw up a comprehensive household budget and work out realistically the level of payment you can manage to avoid the possibility of penalty charges for missed payments. If you're concerned that your income might fluctuate, you could consider a stakeholder pension; these are more flexible, allowing you to vary your contributions as your circumstances change.
Get the right investments. A pension scheme will usually offer a variety of funds in which you can invest your savings pot, depending on how much risk you wish to take with your capital. These will vary from very cautious cash-based investments to riskier, more adventurous investments in volatile specialist markets. You may also want to consider ethical investment. Before committing, make sure you're happy with the level of risk you're being exposed to and how easily you can move your funds, ie, to reduce your risk exposure as you approach retirement.
Find out what charges you're paying. A BBC investigation in 2010 found that some pension providers were charging fees and commissions of up to 80 percent of the money paid into some pension funds. Make sure your provider clearly lays out what charges you'll need to pay for the administration of your pension scheme. These could include annual management charges, penalties for early retirement or missed payments and charges for switching money between funds. Stakeholder pensions have strict limits on annual charges of 1.5 percent of your pension fund for the first 10 years and 1 percent thereafter.
Even if you think you're a hotshot player on the markets, getting a personal pension is a vital and complicated decision that you shouldn't go into without careful planning and professional advice. Don't commit to anything until you are completely satisfied. Contact the Pensions Advisory Service or an independent financial adviser, who will be familiar with the various offerings on the market.