What Features Make the Best Pensions Better Than the Rest?
Throughout your working career, you are likely to have the opportunity to invest in at least one workplace pension. Perhaps you are among those workers already doing so and looking for opportunities to invest elsewhere. You can look at stakeholder pensions, SIPPs or, in the case of changing jobs, an entirely new workplace pension. That's one of the prime benefits of pension investing. There are lots of options to look at over multiple decades of working.
The question pension investors often struggle with is that of determining which is the best pension option for them. In that sense, having so many options may not always be ideal. But with a careful analysis and sound advice from a qualified financial advisor, just about any consumer can determine the best pensions that are most likely to help them secure the retirement they are dreaming of.
Choosing the best pensions for you is a matter of knowing the features offered by each of the options you are considering. We will talk about some of those features in just a moment. First, however, you should understand that not all pensions are structured the same way. The two primary kinds of pension schemes in the UK are known as defined benefit and defined contribution. Here is a brief explanation of both:
- Defined Benefit – A defined benefit pension is one that guarantees a minimum income in retirement regardless of how well the pension scheme has performed with its investments. These kinds of pensions are routinely offered to public sector workers and, in some cases, private sector workers employed by large corporations. The private sector is gradually phasing out defined benefit pensions because these are so costly.
- Defined Contribution – A defined contribution pension offers no guarantees. The amount of money a pensioner receives in retirement is directly related to his or her contributions and the overall investment performance of the scheme. Defined contribution pensions are the most commonly used in the UK.
Virtually every pension available in this country can be categorised as either defined benefit or defined contribution. As for their features, these can vary from one pension scheme to the next.
Pension Features to Look For
In your search for the best pensions, you will discover some features are nearly universal to all schemes. You will also find other features that not every pension operator chooses to offer. Finding the right balance of features is one of the goals of shopping around for a pension plan.
Here are some of the most prominent features you want to keep an eye on:
- Low-Cost Management – One of the ways pension operators make money is by charging management fees. Such fees usually consist of a flat charge plus a percentage of each member's total account value assessed annually. Stakeholder pensions are attractive in this regard because the government limits management fees to 1.5% per year.
- Free Transfers – Being able to transfer in or out of a pension without having to pay additional fees is a big plus. Why pay for the privilege of transferring when your pension operator is earning money from management fees? Look for a pension scheme that offers free transfers if you believe you might be transferring the future.
- No/Low Exit Fee – There are some private pensions with early exit fees attached. The fees are designed to discourage members from cashing out or transferring prior to the age of 65. If you think you might want to take advantage of pension reform before you retire, look for a pension scheme that offers low exit fees or none at all.
- Annuity Transfer – You might begin investing in your pension with every intention of transitioning to an annuity when you reach retirement. If this is important to you, there are pension schemes that offer automatic transition to an annuity at a certain age. As long as the price is right, this might be a good feature for you.
- Investment Advice – Not all pension operators offer qualified investment advice along with their services. This is especially true in the SIPP market. You need to decide whether you want to work with a financial advisor independently or you want to get investment advice from your pension provider.
- Additional Benefits – Members of defined-benefit schemes are sometimes eligible to receive additional benefits provided by the pension operator. For example, the operator may contribute additional funds to act as a bonus that encourages members to remain members for as long as possible. These are certainly worth looking into before you purchase a pension plan.
Pension operators are required by law to be completely upfront about the terms, conditions, and features of the pensions they offer. Do not be afraid to ask for the information. The more you know about the features you have to choose from, the easier it will be for you to decide from among the best pensions available.
Looking Beyond the Features
Paying attention to the features of various pension plans is a good idea, but what if the workplace pension offered by your employer does not offer enough of them to make the scheme worthwhile? Or what if you are already invested in a pension that introduces new features you do not like or takes away some you do? The obvious answer is to find another pension to transfer into. In light of that, you should probably be aware of the different kinds of pensions you have to choose from:
- Occupational Pensions – An occupational pension is the same thing as the workplace pension. It is just a different name for the same kind of scheme. Bear in mind that you are under no obligation to participate in your employer's workplace scheme. You can always opt out and move your money elsewhere.
- Stakeholder Pensions – A stakeholder pension is a personal pension you obtain through a bank, insurance company or specialist provider. Your employer may or may not offer access to a stakeholder pension; you will have to check with the human resources department to know for sure. Those who invest in these schemes do so because they like the added flexibility and low charges.
- NEST Pensions – The NEST scheme was established by the government a few years ago to help employers meet their auto-enrolment obligations. You may already participate in one if your company established an auto-enrolment scheme within the last three years.
- SIPPs – Self-invested personal pensions are exactly what their name implies: pensions workers set up by themselves through the providers of their choice. They are completely separate from workplace pensions, although your employer can choose to contribute to your SIPP instead of an occupational pension.
- SSAS – The small, self-administered scheme is a limited pension product designed for companies looking to offer benefits to their directors. These pensions are limited to a maximum of 12 members, so they are not useful for larger companies with lots of employees.
Each of these different kinds of pensions will have its own features depending on how they are structured. What you need to remember is that you have the legal right to utilise the best pensions for your circumstances. You are not locked into your employer plan or any of the personal plans we outlined here.
Also, remember that you can transfer from one plan to the next if you discover you have made a mistake. But be careful in this regard: transfer and early exit fees can be punitive. Know what those fees might be before you establish any new pension from scratch. That way, you will not be caught off guard should you decide a transfer is necessary.
The best pensions are out there. You just need to go and find them.
Our panel of FCA Approved Pension Experts Will Help You:
- Free Initial Assessment of Your Current Pension Funds
- Find Out Your Projected Retirement Income
- Understand The Most Appropriate Alternative Investments
- Find Out How The Latest Pension Changes Affect You
- Release Cash From Your Pension
- Discover The Benefits of Changing Pension Providers