There are three main pension types:
1. Private (or Personal) Pension
2. Company (or Occupational) Pension
3. Stakeholder Pension
Each type has its own advantages and disadvantages. However, when compared to other ways of saving for your retirement, there is one major advantage that they all share; any money you pay into your pension is not taxed.
The Private Pension (Also called a Personal Pension)
You pay regular monthly amounts to a pension provider who will invest the money on your behalf, building up your pension fund.
If you are still able to join a company pension scheme, especially one that includes contributions from your employer, you would be wise to do so. Unfortunately, as we hear all too often, company pensions are being closed to new employees or even closed down altogether.
A private pension therefore may be the best option for the rest of us. Almost anyone can take out a private pension providing they can make regular payments and the pension providers do not place restrictions on who can pay money in to the pension. This means that in addition to your own contributions, partners or other family members could help you save for your retirement.
You will receive yearly forecasts from your pension provider that tell you how much you have in your fund and the what they predict your pension income will be if you continue to pay in at your current level.
The final value of your pension fund will depend not only on how much has been paid in but how well the fund’s investments have performed.
Your pension will be subject to ‘administration’ charges that will be taken directly from your pension fund. Administration charges will be shown on your yearly forecast.
What to look for in a private pension
Choosing your pension scheme is an important decision so you will need to shop around for the scheme that best suits your plans. When considering a pension schemes, make sure you understand:
The rules for making contributions: who can make payments, are there minimum or maximum payment amounts and what happens if you take a payment break?
Where will the money be invested: some investment policies are more risky that others but promise a better return. Are you prepared to gamble your pension or do you want to play safe?
The administration and set up charges: all pensions have them but make sure that they are reasonable for the amount you intent to contribute.
A pension scheme should also allow you to take a tax-free lump sum when you retire. Doing so will reduce the amount in your pension fund and therefore it will also reduce the amount you have with which to purchase an annuity.
And when I retire…….
Providing you’ve been able to make regular payments in to your pension fund over a number of years you can use it to buy an annuity that will pay you a regular income for the rest of your life.
Do shop around to find the best annuity for your requirements. You don’t have to buy one from your pension provider. If you can’t find one that suits you now, you could draw a taxable income directly from your pension fund until you find the right annuity.