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Choosing a Pension Fund Made Easy

Choosing a pension fund might be one of the most difficult decisions the average UK worker has to make. It is not like choosing your favourite football team, which is usually related to the club situated most closely to where you live. With pension funds, there are far too many options to make a quick and rash decision. Choosing wisely requires taking the time to gather all of the appropriate information, seeking advice, and then making a decision based on what appears to be best for your future retirement goals.

In this guide, we will explain different kinds of pension funds to help you better understand your choices. However, before we do, the wisest course of action for you to take is to utilise the advice of a certified financial advisor with experience in pension investing. Choosing a pension fund is not only a difficult task but also it is one that will have long-term effects for your future. A well-made decision can ensure you have more than enough income to enjoy retirement; a poorly made decision could mean you run out of money before you pass on.

Auto-Enrolment Is a Start

The new auto-enrolment rules that went into effect in 2012 are a good starting place for pension investing. The rules require almost all businesses in the UK to automatically enrol qualified workers in a pension fund that meets minimum requirements. If you are between the ages of 22 and the state pension age and earn more than £833 monthly, auto-enrolment applies to you.

Companies have different staging dates depending on their size and number of employees. The final staging dates do not kick in until 2018, so it could be that your employer's staging date has not yet arrived. When it does, they are required to supply you with all the information you need about the company-provided pension. All qualified workers will be automatically enrolled unless they choose to opt out.

You may decide to opt out for number of reasons, including:

  • A legitimate financial hardship preventing you from contributing
  • A desire to direct your pension monies elsewhere
  • The existence of an active pension elsewhere
  • A desire to set up your own stakeholder pension or SIPP.

Any decision to opt out should only be made in light of other existing means to save for your retirement. The whole point of auto-enrolment is to encourage workers to save. If you have nothing else in place, opting out of your workplace pension defeats the purpose of auto-enrolment.

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The Different Kinds of Pension Funds

Most of us are aware of the difference between defined contribution and defined benefit pension schemes. Nevertheless, these two classifications are just the start. Under these two broad categories is a full range of pension options that workers have to choose from. With the exception of military pensions, the most common choices are:

  • Occupational Pensions – An occupational pension is one that is established by an employer and offered to qualified workers. These pensions are usually provided by insurance companies, banks, or specialist pension providers. Companies looking to comply with auto-enrolment rules can now choose the government-backed NEST pensions as a low-cost, easy to set up option.
  • Personal Pensions – Personal pensions may or may not be offered through an employer. The main difference between a personal and occupational pension is the status of the contract. The contract for a personal pension is between the pension provider and the individual member, regardless of how the pension is obtained. Occupational pension contracts are between employers and pension providers.
  • Group Personal Pensions – A group personal pension is simply a personal pension offered to a group of employees through an employer. Members enjoy the benefits of greater investing power without sacrificing the individual contract status between member and provider.
  • Stakeholder Pensions – The stakeholder pension is a kind of personal pension provided by a bank or insurance company. These pensions may or may not be offered through employers. At any rate, the pension is established between the member and provider, with the provider acting as the administrator.

You are free, as an employee, to ask your employer about all relevant information relating to the company's pension options. You might also check with your union if you are a member of one. Unions sometimes have information about employer pensions or pension funds of their own.

Deciding on a Pension Fund

Now that we have explained auto-enrolment and the different types of pension funds available to UK workers, the next step is for you to start working on making a decision. The first thing to know is whether you qualify for auto-enrolment or not.

Again, if you are between the ages of 22 and the state pension age and you make at least £833 monthly, you must be automatically enrolled in your company's pension plan. Some workers in other age brackets and income levels can opt in to a company pension fund that would include contributions from both employer and worker. A third group of workers not meeting minimum income requirements still has a right to enrol in a company pension but may not be eligible to receive employer contributions.

We recommend you visit the Pensions Regulator website for complete information about auto-enrolment. You should also check with your employer to find out when their staging date is and if that date is already past, why you have not been informed of your pension options.

When shopping around for a pension fund, keep the following considerations in mind:

  • Asset Type – Pension funds have a lot of options regarding the types of investments they make on behalf of investors. Asset types can include everything from equity investments to cash funds to property.
  • Fund Management – The money you invest can be managed either actively or passively. Active management means the fund manager chooses how money is invested; passive means the fund is invested by tracking a relevant index.
  • Fund Charges – Every pension scheme charges members a variety of administrative fees. Most also charge early exit fees. Be sure to compare these fees and charges to make sure you are getting the best deal.
  • Investment Risk – Pension funds present investors with a certain level of risk directly tied to the assets in the fund. Be sure to investigate risk profiles in order to find a pension fund that is most closely matched with your level of risk aversion.

It could be that the workplace pension offered by your employer meets all your needs based on the four considerations above. Such a case will allow you to participate in your workplace plan without a whole lot of effort on your part. Nonetheless, if your company pension does not live up to your expectations, you may want to opt out and set up a personal pension of your own as an option.

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As stated earlier, the advice of a certified financial advisor is indispensable for wisely choosing a pension fund. An advisor is the best qualified to help you develop, implement, and maintain a wise investment plan that will secure your financial future. While there are some investors more than capable of handling things on their own, most people need at least some help. You might just as well get that help from an expert.

If you are already investing in a pension that you are not pleased with, you may be able to transfer to a more attractive pension fund without sacrificing a lot by way of early exit fees. Check with your current administrator for details. If you can transfer out, follow the same advice we have offered to new pension investors: conduct plenty of research, get sound advice, and make a decision based on achieving your future goals.

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