In previous articles, we've covered the various types of pensions and why it's best to start investing early. Now it's time to look at which pension might be best for you. We believe any pension is better than no pension. But depending on your circumstances, one particular flavour of pension may benefit you more than others.
The pension schemes currently available to UK residents and citizens are:
- Workplace Pension
- Stakeholder Pension
- Personal Pension
- Self-Invested Personal Pension (SIPP)
- Small Self-Administered Scheme (SSAS).
The ‘Every Person’ Pension: Workplace Pension
For the majority of the UK workforce, the Workplace Pension will naturally become your retirement pot. It's simple; your employer sets it up on your behalf, and your contributions can be automatically taken from your salary. No thought required.
Workplace Pension Pros:
- It’s your employer’s responsibility to set it up.
- By law, your employer must contribute a minimum of 3% of your salary.
- If you're eligible for ‘automatic enrolment’, you don't need to specifically ask to be included.
- Ongoing charges are capped at a maximum of 0.75% per year.
- Gets younger people in employment to start saving for retirement – as we know, the earlier the better!
- It’s truly the ‘set-and-forget’ pension.
Workplace Pension Cons:
- They do the minimum required to meet obligations set out by the government.
- Changing employers can leave you with various pensions, making them harder to keep tabs on.
- Default fund choice is often ‘cheap and cheerful’ and might not be the best for you personally.
- Selecting a different fund from the default fund removes the maximum charges cap (the ongoing fees will depend on the fund you choose).
Workplace Pension: The Verdict
The best approach to a workplace pension is to be active in the process. Sure, one of the main benefits is that you don't have to do a thing but spending a little time investigating your preferred fund and maximising your contributions on top of your employer’s contributions can help to build a healthy looking retirement pot.
The Modest Start Pension: Stakeholder Pension
Designed for those with modest earnings, the Stakeholder Pension facilitates lower minimum contributions while retaining certain features like capped maximum charges.
Stakeholder Pension Pros:
- Payments from as low as £20 per month.
- Stop and start your payments as required.
- Make one-off lump sum contributions when you want.
- Ongoing charges are capped at 1.5% per year for the first ten years and 1.0% per year after that.
Stakeholder Pension Cons:
- The onus is on you to pick the provider and set the pension up.
- The fund selection can be rather limited (sometimes only 20-50 to choose from)
- Limited fund choices make appropriate diversification tricky for the non-professional
- You may be tempted to ‘pause’ your contributions and forget to restart them.
Stakeholder Pensions: The Verdict
Stakeholder Pensions can be a fantastic option for those who need a straightforward solution. Giving you flexibility on your contributions and peace of mind with ongoing charges caps; you can't fault the Stakeholder Pension as a starting point. Given the often limited fund choices, a Stakeholder may not be where you want to keep your retirement pot long-term.
The ‘In-Control Investor’: Personal Pension
The Personal Pension works in a similar way to a Stakeholder but gives you more options. As we all know, with great power comes great responsibility. Personal Pensions often require more consideration to set up and maintain, to ensure your money is working how you want it to.
Personal Pension Pros:
- Low minimum contributions, often from £50 per month
- Flexibility to stop and re-start contributions as needed.
- Make additional lump sum contributions when you want.
- Often broader investment choices than a Stakeholder, including higher-risk options that could improve returns over the long term.
Personal Pension Cons:
- The onus is on you to select the provider and set the scheme up.
- No cap on ongoing charges.
- Can be hard to calculate the total annual cost, and what impact costs are having on investment returns (known in the industry as ‘Reduction in Yield’).
Personal Pension: The Verdict
If you're a reasonably savvy investor that wants to set up your own solution based on your needs and goals, the Personal Pension could be a great option. The only caveat is that this should not be treated like a ‘set-and-forget’ pension. Leaving it without oversight isn’t advised. Make sure to check your annual plan statements and that you understand the content.
The Experienced Investor: Self-Invested Personal Pension (SIPP)
A SIPP is the most appropriate option for investors with existing wealth who are financially knowledgeable and want flexible ways to grow & protect their assets.
- Larger range of investment options, including:
- direct equities
- commercial property
- fixed-rate deposit accounts.
- Options to link with third party platforms, increasing the fund range even further.
- A broad range of flexible options for withdrawing your money at retirement.
- Set up fees are normal and can be costly.
- Additional admin charges often apply for things like linking to third party platforms or simply taking benefits at retirement.
- No maximum cap on ongoing charges.
SIPP: The Verdict
The SIPP is a powerful option for those with financial knowledge and sufficient wealth to justify the increased costs. Investors can benefit from improved returns thanks to the increased investment flexibility.
The Director’s Pension: Small Self-Administered Scheme (SSAS)
Set up by limited company directors for specified employees, this trust-based occupational pension is designed for groups of individuals who run a common business.
- Investment flexibility & control, offering a broad range of investment options, including
- direct equities
- commercial property
- fixed-rate deposit accounts
- Depending on the number of scheme members, the ongoing cost per member can be lower than holding an individual SIPP.
- Commercial property held within a SSAS is exempt from Capital Gains Tax on final sale.
- Not cost effective for companies with only a small number of employees.
- Legal reporting responsibilities, management and administration tend to be very hands-on and time consuming.
- Each member must be a trustee and must agree to investment decisions.
- Assets are pooled, which can make it difficult when individual members have different risk profiles.
- Keeping individual finances discreet can be difficult and there can be investment delays.
SSAS: The Verdict
A SSAS can be a valuable option for businesses with multiple employees. However, it's not an option that suits most individual people.
Learn more about which pension might be best for you. Contact Wise Investment.
The above information is for educational purposes and is not a personal recommendation or investment advice. Content is accurate at the time of writing and tax limits may change. If you are unsure about the suitability of a particular investment you should speak to an authorised financial adviser. The value of investments can go down as well as up. Wise Investment is authorised and regulated by the Financial Conduct Authority (FCA 230553).
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