Choosing a personal pension
Having a personal pension isn’t for everyone but for some it could be one of the most important financial decisions they make.
First up the self-employed. When you work for yourself, you’re the only one that’s going to be paying into your pension.
Then there are those who have done the maths and know they need to be saving more. Here, a personal pension supplements their workplace and state pension.
Other reasons include people wanting to take more control over how their pension is invested and to bring old pensions together under one roof.
The list goes on, but hopefully this shows there are all sorts of reasons why a personal pension could be an important move.
The next challenge is finding the right one.
In this guide, we’ll cover what to think about and how to go about choosing the best pension plan and pension provider for you.
Before we start it’s important to know this article isn’t personal investment advice. As an individual investor you’ll have to make your own decision based on what is right for you or if you are unsure, seek financial advice. It’s also important to understand that the value of your investments can rise and fall, and you may get back less than you invested.
Which type of personal pension?
There are three types of personal pensions in the UK to understand. Ordinary, stakeholder and self-invested personal pensions (SIPP).
The main difference between them boils down to investment choice, i.e. what your pension is invested in and who makes that decision.
Ordinary and stakeholder personal pensions tend to have a set range of off the shelf investment options. So while you or perhaps a financial advisor might choose an investment fund (perhaps something with a sustainability focus or tailored to a specific retirement date) someone else (likely a fund manager) will choose how that fund is invested.
SIPPs, however, tend to offer a lot more freedom when it comes to investment options. You can build your own portfolio of shares or select ready-made investment options, like funds, ETFs and investment trusts.
Not sure which personal pension suits you best? Here are a few ideas:
Finding the best pension plan
The best. It’s a funny concept when you think about it.
For something that’s meant to mean the number one, ultimate option, there certainly are a lot of them. Just ask Google.
The thing to remember when it comes to looking for the best pension plan or provider is that there isn’t really a best, there is just the best for you.
With that in mind, the next two sections will cover the questions you should be asking any future pension plan or provider.
Tips for choosing a personal pension plan
Here’s a checklist to keep in your back pocket before you part with any cash:
- For ordinary and stakeholder pension plans, understand how your pension pot will be invested. Is the pension fund diversified and invested in a range of assets? Can you see the specific investments and do they match your values?
- For SIPPs look at what you can invest in. Whether it’s stocks or ETFs, is what you are after there?
- How an investment has performed in the past is not a reliable guide to what it could do in the future. But it’s still one of the most important things to check.
- With ordinary and stakeholder plans, you should look at how the fund has performed and how that fits with what its prospectus said it would try to do.
- With SIPPs, you might still be looking at a fund or an ETF’s performance but you could also consider the performance of individual stocks. Comparing performance to the most relevant stock market index can be a rough and ready test but we suggest checking out our guide on picking individual stocks too.
- Check if the pension plan has a minimum amount you have to contribute.
- Can you make one-off payments as well as regular ones? Having this flexibility means you can match up pension payments with your income.
Tips for choosing a personal pension provider
Once you’ve thought about the best type of pension plan for you. It’s time to find a pension provider.
We think a good way to narrow down potential providers is to think about features and fees.
For features think about:
- What type of personal pension would you like, do they offer it?
- Do they have the right investment options for you? Stocks, ETFs, investment trusts or funds?
- Would you prefer an investment app, web-based product or both?
- Would you like to be able to have other accounts like an ISA in the same place?
- Would you like educational content to help you make investment decisions?
- Would you like to be able to speak to customer service if needed?
- What are the options for when you want to start taking money out of a pension pot?
- Are your investments safe? Is the company authorised and regulated by the FCA? Will your pension pot be covered by the Financial Services Compensation Scheme (FSCS)? Is client money kept separate (segregated) from business money?
When it comes to fees make sure you’re clear on how the platform charges you.
Here are the fees to understand:
- Account charges - how much does a pension account cost and is it a flat fee or a percentage fee that could grow as your investment does?
- Trading commission - how much does it cost to place a trade?
- Foreign exchange fees - how much are you charged to buy overseas investments?
- Ongoing charges - for pension investments like ETFs, investment trusts and funds
- Exit charges - some providers charge you for leaving them
- Drawdown fees - how much does it cost to start taking money out of your pension?
💡 Take a look at our investment fees calculator which compares charges across different platforms.
Should you use a financial adviser?
Most of this article has focussed on you making the decisions when it comes to what pension and which pension provider, yourself.
Doing it yourself is perfectly normal, whether you’re a beginner or an experienced investor.
However, there are other options.
Financial advisers and their younger siblings robo-advisers are the most common alternatives.
Financial advisers are generally professionals you pay (like lawyers, private doctors etc) to advise you on your personal finances.
They can help you with all sorts of things from choosing a pension plan to looking after the whole thing for you. Financial advisers can also help with more complex questions, like what to do as you approach retirement or inheritance planning.
The big differences to know about financial advisers and choosing the investments yourself are:
Advice can vary from a one-off cost to an ongoing fee if they continue to look after your pension.
Advice, not guidance
An advisor can tell you what they think is the best option for you personally, having assessed your goals and financial circumstances. Whereas any educational articles (like this one) can only aim to give you the information you need to make the right decision for you.
A lot of people find they can manage their money themselves after a bit of research but if that feels like a hassle or you have a particularly complicated situation, an adviser might add value.
Like a financial adviser a robo-advisor costs money and in return they will make a personal recommendation. However, unlike a financial advisor, it’s likely to be an app or website doing the telling.
Robo-advisors will base their recommendation on a range of questions to assess your investing goals and financial circumstances. At the end of the process, they will automatically invest your money for you.
Whichever route you go down is totally up to you. However, given the additional cost of the advice options, we think it’s a good idea to stop and check if you really need it.