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If you're looking at trying to improve the returns on your existing pension read the repensioning article and if you're choosing between your company pension and a private pension read pension extras for more.
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Confused? Ignore whatever you've heard. This all stems from a fundamental misunderstanding of what a private pension is. It isn't a product, but simply a tax-free wrapper to save money for retirement. Their bad rap is because the ‘with-profts' type investment used for most people's pension performed dismally. (For more info see my ‘the one word that caused the pension crisis blog').
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Money is paid into pensions before income tax is taken off. So when a basic 22% rate taxpayer invests £100, it only costs them £78 because this is all that would've been in their pay packet; it only costs higher 40% rate taxpayers £60.
Thus basic rate taxpayers get an instant 28% investment boost (i.e. pay £78 get £100) and higher rate taxpayers 60%. This is why pensions should be taken seriously.
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Before starting, it's worth noting those in debt are far better off getting rid of that before pension saving. Plus a pension's only one form of retirement planning, combining it with property and other investments is the best way.
Put this percentage of your salary aside each year until you retire.
- Don't delay. The sooner you contribute the longer your money has to grow and the compounding effect makes a massive difference.
- Keep the payments up. It's important to put away a constant proportion of your earnings, so as your pay increases, ensure contributions increase proportionately or you'll fall behind.
- Use the ‘pay-rise trick'. Most people will be unable to contribute enough at the beginning so my tip is start with whatever you can, but each time you get a pay rise, immediately start putting a quarter of it each month into your pension. Thus you'll be basking in the glory of more money, without getting used to spending the money destined for your pension.
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Private pensions fall into two main camps:
- Personal Pensions and Stakeholders.
Pension providers set plans up and offer you a limited choice of funds to invest in, usually based around stocks and shares type investments.
The main difference between personal and stakeholder pensions is that with stakeholders (which were introduced in 2001) the provider's annual charge is capped at 1.5% of the pension's value and they must allow easy transfers of investments between funds and providers. Many stakeholders have less choice of investments than personal plans, but the differences are closing. - Sipps provider greater flexibility.
Self Invested Personal Pensions (Sipps) are completely DIY pensions, allowing you to choose any providers fund or even individual shares. These are primarily for those with larger pension pots, but charges have come down, so active investors prepared to do the leg work themselves can run a SIPP on as little as £50 a month (watch for a new article on the cheapest Sipps soon).
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Once the money is in a pension, it can't be withdrawn willy-nilly, but it must stay there until you're at least 50 rising to 55 for those retiring after April 2010. At that point, 25% of it may be taken as a tax-free lump sum with the remainder to provide a taxable income for the rest of your life.
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Normally a chunk of the charges on a pension is designated to paying an IFA's commission, there's nothing wrong with this, providing you're actually getting advice. Yet, many people with straightforward affairs, simply head straight to the pension company, however the pension company then retains the commission itself.
Claw back the cash.
There are a number of specialist pension discount brokers, with whom you just tell them the pension you want and they arrange it without advice. This means they can rebate some or all of the commission they receive back into your fund, effectively reducing the charges compared to going direct. Even though it's only fractions of a percentage point, the effect of compounding means it can add up to £1,000s.
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Only a few companies do this, so the comparison is swift.
Both these companies offer a very bare bones service, alternatively Hargreaves Lansdown's discount arms take you through picking a stakeholder and investment choice (though its not technically advice) via their website and a printed brochure. There's no fee, but they still rebate a proportion of the commission.
To see the difference using a discounter would make to you, simply ask the pension company and the discounter for an illustration based on an identical set-up. It worth noting, occasionally buying direct via the provider's website, will result in a better discounted charges, but it's rare.
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Using this route means you're unadvised, often not a problem, but if you're confused, unsure, or have complex circumstances, it's best to be safe and see an IFA. Website www.unbiased.co.uk lists advisers local to you.
- Anna Bowes, Chase de Vere: picks Standard Life and Legal and General, for both fund choice and the strength of the internal fund management.
- Tom McPhail, Hargreaves Lansdown picks Scottish Widows as it offers other companies fund managers within its stakeholder pension.
| The Size of the Saving |
Put £200 a month into a Norwich Union stakeholder pension over thirty years, assuming 5% annual growth, and the fund would be £136,000; yet buy the same pension via Cavendish for a £35 fee and it'd grow to £148,000, £11,000 more, just by buying it a different way.
Warning: This is simply an example to show the impact of using a discount broker on a fund, the choice of Norwich Union is random rather than a recommendation.
| Invest £200/month in a Stakehodler for 30 years (assumes 5% fund growth) | |||
| How its bought |
Fee |
Final Fund |
Fund Increase |
| Direct at full commission |
None |
£136,000 |
- |
| Via Hargreaves Lansdown |
None |
£143,000 |
£7,000 |
| Via Moneyworld-IFA |
None |
£146,000 |
£10,000 |
| Via CavendishOnline |
One off £35/25 (1) |
£148,000 |
£12,000 |
| The specific example was done via quotes on a Norwich Union Stakeholder pension (1) depending whether done on-line or offline | |||
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