Your first pension – the options
Once you’ve decided to start saving into a pension, you’ll need to choose where to save. There are many different providers to choose from, but your first task will usually be to select the type of pension that’s right for you. In the article below we explain which of these it makes sense to consider first.
- Joining a workplace pension scheme
- Setting up a personal pension
- How to invest your pension savings
- Do you need a financial adviser?
Joining a workplace pension scheme
If you have access to a workplace pension scheme, then it’s likely to provide you with the most convenient route into pensions saving.
Schemes with employer contributions
Workplace pensions are particularly advantageous if your employer will contribute to the scheme.
If that’s the case, then joining the workplace scheme is usually a great way to start your pension savings.
Any money you put into the scheme will be topped up twice – first by your employer and second by the government, in the form of tax relief.
Schemes without employer contributions
Even if your employer doesn’t currently contribute to their workplace pension scheme (employer contributions are gradually being made compulsory), there might still be advantages to joining rather than making your own pension arrangements.
For example, signing up to a scheme offered by your employer cuts down on the time and admin involved in starting your pension savings.
In a workplace scheme, contributions are taken directly from your pay.
But against that you need to consider that there might be better deals available on the market, such as personal pensions with lower charges than your employer’s scheme.
Setting up a personal pension
If you don’t have access to a workplace pension, then you’ll need to set up your own personal pension.
Unlike with a workplace pension, where the decision you face is whether or not to stay in or join a single scheme chosen by your employer, with setting up your own personal pension the decision is much broader because there’s a wide range of options on the market to choose from.
Important things to consider when comparing personal pensions include:
- The charges for setting up and running your pension.
- Any rules that apply to the timing or size of your contributions.
- What the investment options for your fund are (see the section, below).
- How easily you can transfer your savings to another scheme if you want to.
There are three types of personal pension:
- Standard personal pensions - where you make regular monthly payments into a plan usually with a wide range of investment strategies chosen to suit different needs and attitudes to risk.
- Stakeholder pensions - which are a form of personal pension with low and flexible minimum contributions, capped charges and a default investment strategy if you don’t want too much choice.
- SIPPs (self-invested personal pensions) - which tend to be suitable for larger contributions. They give you a large degree of control over the way your pension savings are invested, but this brings extra risks with it if you’re not an experienced investor and their charges might be higher.
How to invest your pension savings
Part of the process of choosing your first pension will be to decide how it is invested.
Your chosen pension provider will offer you a range of funds to choose from.
Each of these will have a different investment profile – that is, they’ll invest your pension savings in a different range and mix of assets (cash, bonds, shares, and property) and therefore offer different levels of risk and potential growth.
Many providers offer the option of a ‘lifestyle fund’ or ‘target-date fund’.
These have investment profiles that shift over the years.
They typically start off weighted towards assets that offer higher potential growth, but also higher risk.
As you get older they move towards lower-risk assets.
This reduces the chances of your pension savings taking a hit when they no longer have the time to recover before you retire.
Do you need a financial adviser?
It’s quite possible to start saving into a pension without getting financial advice, particularly if it’s into a workplace scheme.
Bear in mind, however, that some employers provide financial advice as a tax-free benefit.
With personal pensions, unless you’re confident about choosing a plan that is right for you it’s best to get advice.
A financial adviser will look at your particular needs and only recommend investments that are suitable for you.