Page last updated at 00:01 GMT, Wednesday, 25 February 2009

How to find a personal pension

Money Talk
By David Elms
Chief executive of, the professional advice website

David Elms
Pensions are more complex than other financial products, says David Elms

So you know nothing about pensions - except they exist - and you do not have an employer's pension which you can join.

What are the options available to you if you want to do more than rely on the state when you retire?

A clear option is to pay into a personal pension.

This is an investment policy designed to provide a lump sum at retirement and an income for life.

Different options

A stakeholder pension is also a type of personal pension, operating in more or less the same way, except it has to conform to certain minimum standards set by the government. This means they must have lower charges and clear terms.

Personal pensions are purchased from a provider such as an insurance company, High Street bank, building society or most typically, a pension company.

What fund choices do they offer?
What are the charges - such as pension contribution insurance, annual management charges, portfolio charges, switching fees between funds or transfer charges?
Are loyalty bonuses available?
Can I transfer out for free?
Is there a large fund reduction for costs?

They do not appear on comparison websites as they are far more complex and highly individual than other financial products.

Consumers are best off speaking to an independent financial adviser (IFA) who will have qualitative research on the different offers from providers.

Personal pensions are "money purchase arrangements", meaning you regularly contribute to the policy and the money you save is put into investments for you such as bonds or stocks and shares.

Personal pension contributions can be invested in most asset classes. In other words, they can go into UK and overseas equities, fixed interest, cash and commercial property.

When you invest in your personal pension, there are no guarantees of returns and the value of your investments can fall as well as rise.

Returns are based on the level of risk and fluctuation you are willing to take in pursuit of your gain.

For this reason, it is wise to alter your asset allocation over time by lowering your risk levels as you draw closer to retirement. This could be done by turning to either cash or fixed interests, such as gilts.

If you are investing in a collective investment scheme, every time you contribute to your pension pot, your money is pooled into an overall pension fund of which you own certain units or shares.

Think of it as a large cake with hundreds of layers of different assets and each time you invest, you are buying a small slice of it.

Personal control

Those who wish to be a little more selective over the slice of cake they buy and exercise some personal control over the investments in their personal pension can choose to invest in a self-invested personal pension (Sipp).

Before you change your pension, you should always check the details in advance with your provider or financial adviser

Sipps provide wide access to most funds and assets, as well as access to buying individual shares, commercial property and many other investment opportunities.

There are two key differences you should consider before choosing the additional option of self-investment for your personal pension.

If you want to utilise a wider and more flexible investment choice, you will pay higher charges for a Sipp than an investor who simply wants access to a cheaper index tracker or an insurance company managed fund in a stakeholder plan.

Most schemes allow full flexibility to stop contributions or move accumulated savings or future contributions to another fund, and there should not typically be any penalties for this.

However, before you change your pension, you should always check the details in advance with your provider or financial adviser.


Personal pensions are usually cashed in at the point of retirement.

Currently, the state pension age is 65 for men and 60 for women - though this is due to increase gradually from 2010, so that by 2020 it will be 65 for women also.

After this, the state pension age for both men and women is due to increase from 65 to 68 between 2024 and 2046.

Whenever you make contributions into your pension pot, the government offers tax relief on these contributions.

This means that for each pound you contribute to your pension policy, your pension provider claims tax back from the government at the basic rate of 20%.

In practice, this means that for every £80 you pay into your pension, you end up with £100 in your pension pot.

If you are a higher rate (40%) taxpayer, it is up to you to apply for the additional 20% tax relief, the difference between basic and higher rate.


When you do retire, there are several different pension options available to you.

Having a personal pension has no impact on your entitlement to a basic state pension

You can exchange your pension fund into a lifetime income by purchasing an annuity, whereby at least 75% of your pension fund is handed over in return for a regular income payable normally until your death.

Alternatively, you can choose to go into income drawdown until you reach 75, when government legislation means you must convert your pension fund into an annuity.

Income drawdown allows you to draw an income directly from your pension fund, while the balance of the fund remains invested.

How much your pension fund is worth at retirement will depend entirely on how much you have put in since taking out your policy and how the investments have performed.

Your pension provider will send you a pension forecast every year that will tell you how much your fund is worth and how much you can expect to receive when you retire if you continue to contribute at your current level.

State provision

Having a personal pension has no impact on your entitlement to a basic state pension.

When they start to pay out they will be taxed together, meaning your state pension will be added to your personal pension and this would be taxed at your marginal income tax rate.

In December 2006, the government announced plans to introduce personal pension accounts in 2012, a top-up to the state system.

These are designed to encourage and enable greater private pensions saving.

Measures proposed include placing a duty on employers to automatically enrol all eligible workers between the age of 22 and state pension age in a good quality workplace scheme and provide a minimum contribution for those who remain enrolled.

This would be added to a minimum contribution from employees and a contribution from the government in the form of tax relief.

The option of redirecting personal pension savings into personal accounts will be available.


In order to thoroughly understand pensions and make the right choice for your circumstances, it is important to talk through your options with an independent financial adviser (IFA).

It is important to check what the IFA's qualifications and areas of specialism are - a pension expert may be better suited to your advice needs.

You will have an initial consultation with your IFA where they will gain an overview of your current financial circumstances to help them decide what retirement products would be suitable for you.

An IFA will be able to recommend products from the whole of the market, so are most likely to help you understand your retirement options and find the best financial solutions to help you enjoy your retirement.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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