Drewberry™ provide pensions, investment and insurance advice for Money to the Masses readers throughout the UK.

 

How do I set up a new personal pension? A quick guide…

The earlier you start a pension, the better, but it is never too late to start contributing as the tax advantages are very favourable.

 

Here’s our Quick Guide to setting up a personal pension.

 

A pension is a long-term savings plan and you receive tax relief on the contributions that you make into it.

 

You can make payments into your pension each financial year which runs from April 6.

 

You can’t access the money until you are 55. However, once you reach that age, you now have a range of different options as to how you use the money.

 

Pensions are particularly attractive for higher rate taxpayers, but anyone can take one out and they offer a good way to save for your retirement.

If you are considering starting a new pension, or transferring an existing one, then Drewberry can help you understand your options and decide what the best route is for you.

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How does a private pension work?

A pension is a long-term savings plan. You can contribute to it each financial year and the money grows free of income tax and capital gains tax. When you come to take your pension, at age 55 or older, you can choose how to withdraw the money from your fund – either in regular payments, lump sum, or leaving it to grow until you need it at a later date.

The closer you are to retirement, the greater your contributions need to be if you have not been previously contributing to a pension. Whatever your age, there are significant tax benefits involved and so it is never too late to start.

You also need to think about how and when you plan to take your pension benefits. Thanks to changes in the rules around pensions you are no longer obliged to buy an annuity with your pension fund. You can instead opt to withdraw portions of your pension over time, and you are entitled to take 25% of the total value of your fund as a tax-free lump sum.

When and how much pension income you take will also depend on your tax situation, and it may be prudent to take financial advice about how to structure your income withdrawal if you are now near to retirement. If you take out a large sum on retirement you may be subject to a large tax bill, which would undo all your hard savings work. Taking advice will help you avoid being landed with extra tax charges.

 

 

Where can I take out a pension from?

If your employer does not offer a pension, or you don’t qualify to join it, or you are self-employed, then you will need to set up your own personal pension.

Pensions are particularly attractive as a long-term savings tool because you receive tax relief on your initial contributions, and then the money grows free of taxation until you retire. When you decide to retire, you can organise withdrawals in order to minimise the amount of tax you pay on your income. So for example, you can increase or decrease the sums you withdraw, depending on how much income you are receiving from other sources.

It is usually only possible to contribute the lesser of up to £40,000 or 100% of your income in any one year and still receive tax relief on your contributions.

You can take out a pension directly from a pension provider, or you can get advice on the best option for your needs from a financial adviser. At Drewberry, we help clients choose the best pension options for their age and personal circumstances.

Choosing a pension can be a complex decision, as you need to be clear about the type of pension you want, and the type of investments you wish to hold within it. We can guide you through the process.

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Types of Personal Pension

Stakeholder, Personal Pension or SIPP?

You might want a straightforward low-cost stakeholder pension, or alternatively a personal pension which you can customise according to your needs and risk profile. Or if you are a more experienced investor you might be interested in a more flexible Self Invested Personal Pension (SIPP).

You can set up your own pension by yourself or with the help of a financial adviser. Although you may be charged a fee by a financial adviser for setting up the pension, they may be able to negotiate better deals with pension providers to lower the cost of buying the investments that will form part of your pension holdings.

Unless you are very confident about choosing financial products you may need the help of a financial adviser to help you decide which pension and investments you need.

Which option you choose depends on how confident you are about choosing your own investments and how much involvement you want to have.

Think about whether you need a product like a SIPP which offers a lot of flexibility and investment choice, or whether you would be happier with a straightforward stakeholder pension.

With a SIPP, the charges are often higher than stakeholder or personal pensions, and there is no point in paying for the extra choice if you are not going to take advantage of it. Ask yourself whether you are looking for a simple low-cost product, or one which gives you lots of investment options.

 

 

How much risk can I take?

Generally speaking, the younger you are, the more risk you can afford to take with your investment, as you will be saving over a very long time frame. You need to find the right balance between the opportunity for growth, particularly in equity investments, and your attitude to risk. As you get older, you may wish to switch your investments to ones which are more cautious and less volatile.

People often think of risk in terms of capital loss – that is, they are worried about their investment going down. The flip-side of this is that there is a risk in being too cautious. If you leave too much of your fund in cash or fixed interest, then your returns may not yield much above inflation. Your financial adviser will be able to suggest options for you which balance the risk of shares with the reward of higher growth, in funds which are most suited to your own personal investment preferences.

 

 

Consolidating your existing pensions

If you have a number of existing pensions it may be worthwhile amalgamating them. However, you should be wary of leaving a final salary workplace scheme as it offers a guaranteed income in retirement without having to take any investment risk.

Some providers may levy an exit charge if you want to transfer out. It is important that you investigate this before you move. Some companies may quote a “transfer value” based on the value of your current fund, minus any costs and charges.

This is a complicated area and it is important to get the decision right as a mistake could mean you lose out on the potential benefit of tens of thousands of pounds. Make sure you know exactly what value you are getting, and if in doubt, consult a financial adviser or pensions specialist who will be able to review and advise you on your personal financial circumstances.

If you have investments with other personal or stakeholder pensions it may, however, be more cost-effective to transfer your holdings into a single pension which is easier to monitor and keep track of. Some pension providers offer lower annual charge rates for larger sums invested.

 

 

Should I get financial advice?

The choice of pension funds, providers and investment choices is very wide and sometimes people can find the process of setting up a pension rather overwhelming.

The advantage of using a financial adviser in the process is that they can look at your finances as a whole – not just your pension provision but other savings and investments such as Individual Savings Accounts (ISAs) and existing pensions or share save schemes at work.

 

Different Pension Options

Advantages

Suitable for

Stakeholder Pension

Low-cost, simple to understand

Everyone, good as a starter pension or as a low-cost element of a retirement plan

SIPP

Offers huge choice and flexibility

Experienced investors who like to take an interest in their investments

Personal Pension

Allows good choice of funds and managers

All investors, particularly the self-employed

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Seeking Pension Advice

A professional pensions adviser will be able to advise you and guide you through the process. If you would like to discuss your contractor pension options you can contact us directly on 020 8432 7333.

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