Pensions: Frequently asked questions
- What is a pension?
- What is an occupational pension?
- What about the Stakeholder pension?
- Why do you need a pension?
- How safe are pensions now?
- How much should I save for a pension?
- Can I have more than one pension?
- What’s the best way to buy a pension?
- Should I pay the pension sales person Commission or Fees?
- Why bother with a private pension?
- What do the experts do with their own money?
- What happens to my pension when I die?
- Who’s behind Pensionsorter? What’s in it for you?
- See how you can get the cheapest Stakeholder pension
What is a pension?
A pension is a way of saving money to ensure a comfortable retirement. In the UK it has major tax benefits which make it the best type of retirement plan for the vast majority of people, who, unless they’re rich, really do need to save for old age. While there are alternative ways of saving the pension is generally the best option for most people.
What is an occupational pension?
Occupational pension schemes (also called Company Pension schemes) are when the employer organises a pension scheme for its employees. It is set up as a trust and run by trustees.
Occupational pension schemes are either Contributory – where you give part of your earnings (typically 6% of your gross salary) in addition to your employer’s contribution, or Non Contributory where your employer makes all the payments. In either case they have to pay for a substantial part of the admininstration costs of the pension scheme, by law. And you also get tax benefit from HMRC (see Tax benefits for Occupational pensions).
What is a stakeholder pension?
This is the new type of pension which the government is hoping will make more of us save for our old age. It was supposed to be aimed at those on “moderate earnings” ie between £9,500 and £21,600 pa. However anyone can get one, even those who aren’t earning eg babies and grannies.
It features low charges and flexiblity eg you can vary payments. It’s everything that the personal pension should have been really.
Why do you need a pension?
The current life expectancy for men is 81 which means an average retirement of 16 years and it’s 86 for women, which means an average retirement of 26 years. And we’re growing older all the time.
The State Pension will only suffice if you’re happy to live on £100 a week or so. If you want to be warm, well fed and have a reasonable income then you need to start a pension and do it SOON. Every month you wait can make a significant difference (see the cost of delaying and/or Savings Calculator).
How safe are workplace pensions now?
If you have a money purchase scheme – where you have your own pension pot and where the employer guarantees nothing – then you are dependent on the regulator, The Financial Services Authority, which now seems to have sharper teeth and be hungrier to seek out bad practice.
With a money purchase plan (and indeed, any other form of personal pension) your main worry is the insurance company that runs it going bust. So far, this has never happened.
But if you have a “final salary” plan, then it could all go wrong if the firm providing it goes bust – as several have. After lots of scandals where employees lost huge sums, there is now a safety net – the Pensions Protection Fund. This is better than nothing but not a full replacement for a lost fund.
On 6 April 2005 the Pensions Regulator took over from Opra (the Occupational Pensions Regulatory Authority). The Pensions Regulator is the new regulatory body for work-based pension schemes in the UK.
How much should I save for a pension?
Most people hope to retire on two thirds of what their salary is at retirement. Very few get there. To achieve this (unless you are lucky enough to have worked all your life for an employer with one of the best final salary schemes) depends not only on how much you save but also on how well your fund managers perform, as you will see from the Savings calculator.
But, regardless, the sooner you start saving the better. The later you leave it the higher your contributions ie payments would have to be.
Can I have more than one pension?
You can have as many personal pensions as you like provided that added together all your payments do not beat your annual or lifetime limits. The only people likely to do this are the very, very well paid as the annual limit is now £255,000 and the lifetime fund limit stands at £1.8m.
You can only contribute to workplace pensions whilst you are actually an employee. This means you could actually have many different former ones operating at the same time, known as “dormant” i.e. you’re not making payments / contributions. But they’re still invested and hopefully growing for you. (This would be if you had left previous jobs and not transferred your occupational pension fund).
What’s the best way to buy a pension?
To give you the best tips we’ve got an extensive section on this called How to Buy a Pension including “The Golden Rules for buying a pension”.
However if you do your homework fairly thoroughly then you could save money by buying direct from a pension provider. But you will have to be careful because it seems your chances of compensation would be limited if the pension isn’t right for you compared to if you go through an IFA (see Execution Only and Buying direct is not always best).
What happens to my pension when I die?
If you die before you retire your pension fund will normally be paid to your beneficiaries. To avoid inheritance tax you should ensure you have put your pension fund “in trust”. (Ask your pension provider).
If you die after you retire what happens would depend on the deal you did for your annuity.
Should I pay Commission or Fees?
The number of fee based IFAs has grown rapidly in recent years. The idea with fees is that you pay these charges up front so that there’s no suggestion that the IFA is reliant on any commission for the pension plan they recommend i.e. the advice is genuinely independent.
The standard charge at the time of writing is around £100 an hour (usually after a free initial meeting). But when you’ve added all the letters and follow up you may find that paying commission would have been cheaper. The IFA should be able to give you a quote. But it’s most likely to be an estimate and the problem is, you see, that no one’s finances are as simple as may first appear… Alternatively they may charge on a transaction basis e.g. you pay a set amount for a report. Though remember; if you don’t follow the IFAs advice you’re still paying for it.
Many IFAs will give you a guaranteed fee ceiling.
Why should I bother with a personal or occupational pension? Can’t I rely on the State Pension?
The State Pension will only suffice if you’re happy to live on £100 a week or so. If not you need to boost this with extra income a private pension is seen as the best way of saving for most people. But don’t forget you may get a boost from S2P – the state second pension while there is a minimum means-tested guarantee.
What do the experts do with their own money?
Keeping many eggs in many different baskets seems to be the approach favoured by the financial experts. They will have a mix including property (but probably not investing in their own home) as well as having a personal pension and several other investments in different markets.
Who’s behind Pensionsorter? What’s in it for you?
This website has been written by expert financial journalists and is owned by people who tried to buy pensions ourselves and became fed up with the difficulty of getting accurate, easy to understand, information. So we researched the field and this is the result.
It is a completely independent, free information service, which can either be used for help with buying a pension, improving an existing pension, or general research. It’s really a labour of love but we may get a modest fee from an IFA for “introducing” you to them. If so, this shouldn’t cost you anything extra, and at least some of any profit will go to a genuine, highly deserving charity.
You may like to give a donation to a charity in return for all this free info. Read more about this.