The world of pensions is a complex one, and hardly one which pops up in general conversation with friends.
But with the UK state pension being among the least generous in Western Europe, saving for your retirement is a good idea.
The new state pension offers £221.20 a week, or £11,502.40 a year, assuming you have worked enough time to qualify. If you want an income above this, you will need to save up.
If you have a defined benefits pension, a generous rarity these days since it offers a set income based on your final salary and years of service with a company or government department, then you are probably best not interfering with it.
If, however, like most younger workers you have a defined contribution pension, a move could make sense.
Defined contribution (DC) pensions are pots of money invested in shares and other assets where the benefit is a lump sum when you retire. A recently set up company pension is probably a DC pension – if in doubt, ask your provider – and any personal pension you have set up yourself will be one too.
These DC pensions are more portable, and it is worth thinking about fees and your choice of investments, especially if you have moved around a bit in your career and racked up a number of them.
Some can be invested in funds which charge high fees, says Ian Cook, a chartered financial planner at Quilter Cheviot.
They may charge up to one per cent for cheap tracker funds which can be picked up for less than a quarter of the cost elsewhere, he said.
But, he cautions, “You’ve got to be careful when comparing fees. Sometimes it feels like all regulators want is for clients to pay the lowest fee.”
In markets like the US, where there is plenty of competition, good funds can be picked up cheap. But when investing in more specialist areas such as emerging markets, having an expert on the ground can help since those countries suffer from more corruption and sudden rule changes that can catch foreign investors unawares.
First, see if you can get a list of the funds your pensions are invested in and what fees are charged for these funds. Your provider should be able to supply this information.
Also check if your DC pension comes with any goodies you will lose if you leave. Some come with generous guaranteed annuity rates, more of your pension in tax-free cash or guaranteed performances for funds. If they do, it’s possibly best to stay put.
Then, it’s time to shop around. You can either pick the cheapest or best you already have to merge the other pensions in to, or you can pick a self-invested personal pension (SIPP), which is a DIY version.
Fees are generally taken twice from your pension. Once from the overall provider who administers the pension. Then the fund managers who invest the money in the stock market or in bonds will take an annual fee.
The key is to get these as low as possible, as the savings can rack up over time.
Your money will be invested in funds, pooled investments that put your money into companies’ shares, bonds (which are like loans you can buy and sell) or property.
Choosing what to invest in is a skilled job, so funds charge a fee. But funds which charge ultra-low fees to merely track a stock market index often perform better than funds where a team of experts decide what to invest in.
Which funds to choose is outside the scope of this article, but there are plenty of guides out there to read. Instead, we will look at some options for SIPPs.
What do the best SIPPs charge?
Pension fees are confusing. Some SIPP providers charge a percentage of the money they manage and some charge a flat fee.
There are also lots of other charges to watch out for. Some providers charge when you buy and sell funds. Some let you buy individual companies’ shares and will charge you for that too.
Which SIPP is cheapest for you will depend on how often you plan on trading your investments, how big your pot is and how many funds you want access to.
Here are some options:
Fees: 0.15 per cent of the value of your pot per year, up to a maximum of £375 a year. You can only use Vanguard’s own funds, but these should be enough for most. Good for smaller pots and those not wanting to turn investing into a hobby.
Fees: A flat fee of £5.99 or £12.99 per month depending on the size of your pot. £3.99 per trade of funds and shares but regular investing is free. Good for larger pots.
Fees: 0.25 per cent. Choose from 2,000+ funds plus shares and other investments at £1.50 a trade. Good for choosy investors.
Fees: 0.2 to 0.35 per cent. No charge to trade funds but up to £7.50 for shares. Good for choosy investors as there are thousands of investments.
Fees: up to 0.45 per cent. Free fund trading but £11.95 per share trade. Good for choosy investors who may wish to swap funds frequently, of which there are thousands.
This sounds like hard work
If nothing else comes of this, having a root through your finances will tell you if you need to increase your contributions to have a comfortable retirement, and help you put your paperwork in order.
If you never look at your pensions, your income in retirement will be a surprise, and it could be a nasty one, especially if you have been overpaying on fees or if your pension provider has put your money in badly performing funds.
If any of this seems confusing, you should probably take independent financial advice from an expert authorised by the Financial Conduct Authority (FCA).
Pensions are rife with scams as well. If offered returns seem too good to be true, they probably are.
One last thing, says Ian Cook, of Quilter Cheviot: make sure to update your death benefit nomination form. Whoever you list will receive your pension when you die, come what may, whether they are an ex-partner you only last spoke to decades ago. A will does not override the nomination.
When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.
