Personal Pensions: A Guide to Building a Retirement Fund

Strategic Insights -

If you're one of the millions of employees or self-employed individuals without access to a company pension scheme, consider investing in a personal pension plan to build a tax-efficient retirement fund. Since their introduction in July 1988, some 5 million employees have taken out personal pensions, but their success has been marred by scandals related to poor advice and high sales commissions. To make an informed decision, focus on the sales and administration charges, flexibility, performance track record, and cost of advice.

Key Takeaways:

  • To get good value for money, understand how personal pension plans work and what features to look for, such as flexibility, performance track record, and cost of advice.
  • Sales and administration charges can be high and are not just limited to the initial contract term but also throughout the duration of the plan.
  • Consider the flexibility of the plan, including the absence of penalties for reducing and stopping contributions, transferring the fund, and early retirement.
  • Choose a fund with a proven above-average, consistent performance track record over the long term.
  • Avoid exotic funds and instead opt for a fund that aligns with your risk tolerance.
  • When selecting a personal pension plan, do not just consider the cost of the plan itself but also the cost of advice from the provider.
  • Ensure the financial strength of the provider is robust to minimize the risk of plan closure or financial difficulties.
  • Over 100 financial institutions offer personal pension plans, mainly life offices, unit trusts, and investment trusts.
  • Some banks and building societies sell personal pension plans from one life office provider, while Bradford & Bingley offers independent advice.
  • To maintain flexibility, avoid plans where the bulk of the sales commission is deducted during the early years.
  • If you join a company scheme, you cannot continue your personal plan, and be cautious of plans that require you to redirect your premiums into a Flexi-Access Drawdown (FAD) product.

Statistics:

  • 5 million employees have taken out personal pensions since their introduction in July 1988.
  • Personal pensions are available from over 100 financial institutions, mainly life offices, plus a handful of unit trust and investment trust groups.
  • Most banks and building societies sell personal pension plans from one life office provider.
  • Bradford & Bingley is an exception, offering independent advice.
  • Contributions to personal pension plans qualify for full tax relief.

Sources:

  • The Financial Times "Pension Scandal" (exact quote)
  • The Financial Times "New rules to curb pension mis-selling" (exact quote)
  • The Financial Times "How to make a profit out of your pension pot" (exact quote)