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Personal pensions: the what & whys of DIY

Catherine Elliott3 May 2019

Pension planning can be confusing. But for anyone who wants to retire with an attractive sum tucked away (and who doesn’t?) it’s one of the most important things to get right.

There’s also a lot of choice out there. The good news is that the majority of UK workers are now part of a workplace pension scheme thanks to new automatic enrolment legislation; as of 1 February 2018, every employer must enrol all eligible staff members into a workplace pension scheme.

But aside from workplace pensions, and the state pension (up to £8,767.20 per year), anyone can take a DIY approach and open their own personal pension independently of any employer.

If you’re new to the world of personal pensions, are considering setting one up yourself, or want to know more about the ins and outs, this blog will help. After all, pension planning isn’t something that should be left to chance.

What is a personal pension?

Simply put, a personal pension is one you set up yourself directly with a pension provider.

All personal pensions are what’s known as ‘defined contribution‘ schemes. All this means is that the size of your pension is defined by how much you pay in — as opposed to ‘defined benefit‘ schemes, which pay a pre-agreed amount based on your income and years of service.

You can access a personal pension from the age of 55 and have flexibility over how you do so — you could take the whole lot in one go if you wanted. If you decide to take a lump sum, the first 25% will be tax-free and the rest will be subject to income tax.

You can also opt to drawdown your pension — in other words, start taking an income from it, while leaving some or all of it invested. The other option is to use your funds to buy a guaranteed, fixed rate income for the rest of your life. This is called buying an annuity.

As with workplace pensions, you’ll benefit from tax relief on any personal pension that you contribute to: 20% for lower-rate taxpayers, 40% for higher-rate taxpayers and 45% for top-rate taxpayers.

(If you contributed £100 from your salary into a pension, as a basic-rate taxpayer it would only cost you £80 in reality. The £20 that would have been taken out in tax will be added back into your pot by the government instead.)

The annual tax-free allowance across all pension contributions is £40,000 (gross) or up to 100% of your salary, whichever is greater. For those who don’t work, the limit is £3,600 per year. If you pay any more into your pensions, you’ll be hit with tax charges.

DIYing it

As well as setting up a personal pension directly with a provider, there are other options available. If you want to be completely in the driving seat of your own investments, you could set up a Self-Invested Pension Plan (SIPP).

While traditional personal pension schemes opened through a pension provider are typically limited by the company’s fund manager, with a SIPP you have free reign over what you invest in: stocks and shares in the UK and overseas, government bonds, investment trusts, unlisted shares, even commercial property. This added flexibility also brings with it the responsibility to choose your investments wisely — more on that a bit later.

So-called ‘stakeholder pensions’ are also a do-it-yourself job. These pensions tend to be for those making lower contributions and perhaps are new to investing. They offer a standard investment strategy so that you’re not overwhelmed by choice if you aren’t sure what you should be doing with your savings.

*Remember – pensions are investments. And as with any type of investing, it’s important you understand the risks involved. The value of your investment could fall as well as rise, and you may get back less than you put in. Tax laws are subject to change.

Who are personal pensions for?

Anyone can open a personal pension — though they’re typically used by those who are self-employed, on contracted hours or not working. You can even open one in addition to a workplace pension if you’re particularly savvy when it comes to your savings.

And if you’re a frequent job hopper, setting up a personal pension could be a good avenue to explore. Because if you’ve ever contributed to a workplace pension over the course of your career changes (chances are you will have), you’ll have to track down all of your old pension schemes — any previous pension pots will lie dormant until you reach State Pension age. Having one personal pension independent of any employer might save you some hassle.

A quick side note: it’s important to keep any pension nominations up-to-date. In the event of your death, your pension savings typically go to the person you’ve nominated. And as you may have done this several years (or even decades) ago, you might be surprised to find out who your old pension savings are actually going to end up with, should the worst happen.

Remember that old flame from ’89? Make sure they’re not in line to benefit!

So, what’s the catch?

Personal pensions can be great for the right type of people. Consider SIPPs — if you know the market well and are confident in your ability to manage your own portfolio, you could be on to a winner. You’ll have complete control over your investments and where you want to put your money — this flexibility is incredibly attractive. (Though if it all goes horribly wrong, you only have yourself to blame too.)

But for those who don’t scrutinise the market, follow changes in regulation and tax allowances, and adjust their forecasts and investment strategy on a continuous basis accordingly (cue lots of hands going up), it might just be easier to let someone else do it for you.

Likewise, shopping around for the best personal pension provider could be a headache for anyone who doesn’t know what they’re looking for.

Which leads onto the next question — will you get round to it? Or more importantly, do you actually want to be responsible for setting up and managing your pension savings?

Some things might be too important to DIY

Just because you have the option to take your pension planning into your own hands, doesn’t always mean you should.

While a do-it-yourself mentality is admirable and works well for some people, when it comes to some of the most important things in life, there’s no shame in asking for help. If you had a health issue, you wouldn’t DIY your diagnosis — you’d let the experts do it.

The same should apply to your pension planning. Retirement is likely to be one of the biggest events that anyone will go through, so preparing for it shouldn’t be taken lightly.

What’s best for me?

Whether you’re confident in your ability to manage a SIPP or you want to work with a third party to set up a regular personal pension (or maybe you’d just prefer sticking to a workplace pension instead), you should talk through your options with a financial adviser.

They’ll help you identify the best course of action for your own situation. Everyone’s circumstances are unique, and your needs are likely to change over the course of your life.

Pension planning can be complex, but it doesn’t have to be a headache. If in doubt, don’t DIY it.

Want to find out more about your pension options? Our chartered financial planners offer independent pension advice — get in touch today.

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