Personal Pension Types
The pension freedoms launched by the government in 2015 mean that there are now many more options for managing your own pension and withdrawing funds. But with so much on offer, how can you know which personal pension type would work best for you?
To find out, it’s important to weigh up pension benefits against the costs and understand which terms would suit you best.
How much of your disposable income can you afford to put aside for your future? And which type of personal pension would give you the investment options and financial flexibility you require?
In this article, we’ll delve into personal pension types and how these defined contribution schemes work.
You’ll find the following topics covered below…
What types of personal pension are available?
A personal pension allows you to save for your financial future on your own terms. This means you can choose the details of how much you pay into your pension every month, where you want to invest your money, and how much risk you’d like to take on.
There are also differences in withdrawal terms and pension admin cost.
The main types of personal pension are…
- Self-invested personal pension (SIPP): These act as a ‘wrapper’ for your retirement investments and give you freedom of choice when it comes to what you invest in. You can read more about these products in our comprehensive guide to SIPPs.
- Stakeholder pensions: A stakeholder pension is a defined contribution scheme based around an individual agreement between the pension provider and the account holder. It isn’t just the account holder who can contribute to these schemes. Some employers offer them to their staff and choose to make contributions to their workers’ pots. You can read more about how stakeholder pensions compare to SIPPs in our guide.
In addition to SIPPs and stakeholder schemes, personal pensions also fall into the following categories…
Individual personal pensions
An individual personal pension is a defined contribution pension scheme where the contract is directly between you and the pension provider – there’s no employer or other third party involved. You save into your individual retirement account and take on responsibility for deciding how to invest your pension savings to meet your retirement goals.
Whether you have a company pension, or you’re self-employed and need to figure out your own pension, you can set up an individual personal pension to gain the specific repayment terms and retirement benefits you want.
Immediate vesting personal pension
Immediate vesting personal pensions (IVPPs) are for people who are retiring or already retired. They give you the option of taking out 25% as a lump sum of tax free cash, and then the fund will use the rest of your pension savings to buy an annuity that will provide you with a guaranteed income for life. However, the income you get from the annuity will be taxable and there’s usually no chance of getting any of your savings back as inheritance when you pass away.
Executive personal pension plan
An Executive Pension Plan (EPP) is a tax-efficient company-led plan for saving up for retirement. Depending on the arrangement, the employer and employee can both pay into this plan and benefit from the usual tax-efficiencies offered for pension savings. When you retire, An EPP can provide you with tax free cash and a pension income.
One of the pension experts we work with can help you with setting up, transferring out of, or optimising an existing EPP.
Which personal pension scheme should I choose?
The answer to this question will depend on your retirement needs and circumstances as well as your appetite for risk. Speaking to an expert advisor before you proceed is recommended but there are a few things to consider before you take the first step towards application.
If the freedom to choose what you invest your retirement savings in appeals to you, it might be worth researching SIPPs and discussing them with a pensions expert, but keep in mind that they are usually geared towards people will a certain degree of investment know-how.
It’s also important to compare SIPPs to the alternative personal pensions available and ask yourself what level of risk you’re comfortable with. Jump to the next section for more information on this or make an enquiry and we’ll introduce you to an expert who would be happy to discuss it with you.
Which level of investment risk should I get?
One of the benefits of setting up your own personal pension is that you get to choose the level of investment that’s best for you and where and how to invest your funds. Investment risk appetite is personal to each of us – it will depend on your financial situation, age, and preferences, and as with all pension plans and investments, you’ll need to start with the end goal in mind.
What are your retirement savings ambitions? How much time do you have to get there? Do you need to raise your contributions or take on a lower or higher rate of risk to achieve your goals?
Here are some personal pension types which offer various levels of investment risk:
A personal pension with-profits is a form of managed investment. A with-profits investment aims to help smooth out the usual ups and downs of investment markets by spreading your investments out. The benefits of this collective investment fund are that you get exposure to a wide range of investment options and it’s all overseen for you by a professional manager.
You can choose to have a with-profits investment as part or all of your personal pension – this type of pension investment is usually offered by insurance companies. A with-profits personal pension makes it possible for your pension fund to be pooled together with other investors’ money and invested into a mix of bonds, shares, property and cash.
This is a pension plan that gives you a choice of ‘unit linked’ investment funds. A plan is ‘unit linked’ when your investment fund is divided up into several equal units, each held by an investor. The value of your unit is regularly calculated by dividing up the total value of the fund by the number of units, so you can see how your fund is performing. You can ‘buy’ more units by paying more money into the fund.
The price at which you can buy the units could be different to how much they cost when you chose to withdraw or switch to a different investment type. ‘Single-priced’ units can be bought and sold at the same price. But an additional charge could be added when you buy the unit.
If you’d like any help with investing in a unit linked personal pension plan, or you’d like to transfer out of one, contact us to speak to an experienced financial advisor.
If you’re looking for a way to save for the future without your investments potentially dropping in value, a low risk pension could be best for you.
A cautious investment fund or an asset portfolio is likely to offer a low interest rate and the option of investing in lower-risk bonds or cash as opposed to shares which are often better performing but riskier investments. A pension annuity is a secure, low-risk pension scheme which will deliver a guaranteed retirement income for as long as you live.
However, it’s worth thinking twice before investing in a low or no risk personal pension. You could end up worse off in retirement than you hoped, with the money gained from low interest rates being gobbled up by inflation.
Make an enquiry to be put in touch with a financial advisor who can help you get the right level of investment risk and rate of return.
A personal pension with risk sharing, or PPR, is a pension where you take on some of the risks of your pension investment. This means that your pension funds will go up or down depending on the economy and investment performance. A PPR takes apart the saving, insurance, and risk-sharing functions of a pension to enable broader investment opportunities that can be customised to a scheme members’ preference.
Transferring your pension
Transferring your pension can give you the option of choosing all aspects of your pension scheme – but bear in mind that switching schemes isn’t guaranteed to be beneficial as you could end up losing more money than you gain and there are sometimes exit fees to pay.
Choosing wisely and getting professional advice before making any major decisions about switching pensions can leave you significantly better off in retirement.
A pensions expert will understand all the details of your situation and can help weigh up the costs and potential advantages of switching or updating your pension into a new scheme.
s226 personal pension plan
Retirement annuity contracts were once called Section 226 personal pensions, s226 pensions, or a self-employment retirement annuity.
The s226 pension was offered until July of 1988 to help people who aren’t offered a workplace pension scheme, such as the self-employed, to put aside a nest egg for their retirement.
It’s no longer possible to set up this type of pension, but you may still have an s226 pension that was set up before its cut off date.
If you’re looking to make changes to your s226 pension, or transfer out of it and into a different personal pension scheme, it’s best to contact a pensions advisor for professional guidance.
Rebate only personal pension
A rebate only or ‘appropriate personal pension’ is a pension that’s used for contracting out of a top-up state pension. If you contract out of your state pension into a personal or stakeholder pension, the government will ‘rebate’ or partially refund some of your National Insurance contributions into your plan.
If you’re looking to switch provider or pension type, the experts we work with can help with professional guidance. If you make an enquiry, we’ll match you with a financial advisor with specialist knowledge for your situation.
Speak to an expert advisor today
It’s best to seek expert advice on how to set up a pension plan that will suit your specific needs, risk appetite, and retirement goals.
The financial advisors we work with can help you find and set up a pension that’s tailored to your unique requirements.
You can benefit from their expertise and experience by getting in touch with an enquiry, or by simply calling us on 0808 189 0463.