What type of pension should I get?
There are a number of different pension options: stakeholder, personal pension, self-invested personal pension (SIPP), small self-administered pension scheme (SSAS), defined benefit and state. It’s important to understand how they differ before deciding which one/s may be right for you.
What is a stakeholder pension?
To encourage people to save for their retirement, the Government introduced a low-cost ‘stakeholder’ pension that allows anyone to start saving for their retirement, up to a value of £3,600 a year including tax relief.
Given that each of us has the ability to fund a stakeholder pension, it means you can set these up for children and grandchildren and get tax relief on the contributions.
If you are employed or have income from self-employment the amount you can contribute to a Stakeholder pension is the same as for any other type of defined contribution pension. These are often viewed as the ideal pension plan for new savers as the charges which can be levied by the pension provider are capped by legislation.
Stakeholder pensions are typically offered by traditional pension companies (Insurance Company) and are not available as a platform pension.
What is a personal pension plan?
These are money-purchase schemes with contributions receiving tax relief. An employer may contribute to an individual’s personal pension plan (PPP) but this is not obligatory.
They were introduced in 1988 to enable the self-employed, and employees working for companies not operating a group pension scheme, to build up a pension fund for retirement. They replaced retirement annuity plans although existing plans could continue.
Personal Pension Plans are generally accessed through an insurance company and typically offer access to a wider range of investment funds than can be accessed through a Stakeholder pension.
What is a self-invested personal pension?
A self-invested personal pension (SIPP) offers you a far greater level of freedom and choice in the investment opportunities you can access. It also allows greater flexibility in how you access benefits at retirement and how you can pass on any remaining funds to your loved ones when you die.
SIPP’s can be accessed in two ways, through an investment platform or a specialist SIPP provider.
A platform SIPP is often referred to as a low cost SIPP or a ‘Lite’ SIPP as it does not allow the same range of investments that a specialist SIPP is able to offer.
A specialist SIPP offers the widest possible choice of investments but most advisers would not recommend a specialist SIPP to someone with a small pension fund because of the charges that can be imposed.
The introduction of platform based SIPPs has made SIPPs more accessible to people with smaller funds who want to be able to access a wider range of investments.
Typically a specialist provider will still be needed if you want to use your SIPP to purchase a commercial property.
Some SIPP providers will allow you to select and manage your SIPP investments. However, the investment decisions you make will ultimately determine your retirement pot and therefore we would encourage anyone considering using a SIPP to seek professional regulated financial advice.
What is a small self-administered schemes?
A small self-administered pension scheme (SSAS) is a small occupational pension that is usually used for the directors or senior employees in a company, and the maximum number of members in one of these schemes is twelve. They are also open to family members of employees, even if they do not work for the employer.
Although it is possible to set up a SSAS as a Defined Benefit scheme it is more common for a SSAS to be set up as a defined contribution pension, so the amount you receive is directly linked to the performance of the underlying funds in the same manner as any other Defined contribution arrangement.
The trustees of the scheme, who are usually the scheme members, hold the assets on a pooled basis so there is no individually identified pension pot for the members of the scheme.
Where the scheme is set up on a defined contribution basis each member is entitled to a proportion of the assets based on the value of contributions made on their behalf and apportionment of growth in the value of the scheme assets.
For a company, the major benefit of a SSAS is that it is possible to buy the premises being used by a company and then lease it back to the firm, and it can also, in some cases, lend money to the company or purchase company shares.
What is the state pension?
The State Pension is intended to ensure that everyone has a basic amount of money to support them in their old age and is paid every four weeks. The new State Pension was introduced for everyone reaching state pension age on or after 6th April 2016.
The amount of State Pension you will receive depends on your National Insurance (NI) record, to receive the full amount you must have at least 35 qualifying years. To obtain a forecast, you should visit the Government Gateway website.
To qualify for any state pension at all, you will need to have paid national insurance contributions for at least 10 years. Those with between 10 and 34 years of contributions will receive a proportion of the pension.
If you have a pension and would like help to decide your options why not arrange a free consultation with a Financial Adviser today?