Personal pensions

Overview

Although it is hard to know exactly what it will pay when you retire, the State Pension is unlikely to provide enough income for a comfortable lifestyle. So to increase your retirement income to a more reasonable level, you should consider additional pension provision.

Personal pensions (also known as a private pensions) allow you to set up your own pension fund if you cannot or do not pay into an occupational pension scheme. It can move with you from job to job.

Do I need a personal pension?

Before you take out a personal pension, you should think about all the other options that are open to you. The most important question to ask yourself is whether a personal pension will give you a better pension than the State Second Pension or any other arrangement, such as an occupational pension provided by your employer.

Other options

Many employers provide occupational pension schemes. If you are an employee and you can join an occupational pension scheme, you will normally be better off doing so. Most employers who run occupational pension schemes contribute to the scheme themselves and some run occupational pension schemes where you do not have to pay any money at all. Occupational pension schemes may also provide extra benefits such a pension to your husband or wife when you die or a pension if you become ill and have to retire early. Occupational pensions are usually very good value, with low charges, so if your employer runs an occupational pension scheme, check it out carefully before you look into any other options.

Stakeholder pensions are straightforward, low cost pensions with strict Government requirements for low charges, flexibility and access. These features include only one kind of charge - an annual management fee - capped now at 1.5%, the freedom to stop, start and vary contributions and to transfer to another scheme without any form of penalties for doing so. If your employer does not offer an occupational pension of a high enough standard, then they must offer access to a stakeholder pension scheme, although they don't have to contribute.

Stakeholder pensions are also available as personal pensions that you can take out yourself.

Some employers who do not run an occupational pension scheme, or a stakeholder scheme may arrange for a personal pension provider to offer their employees a personal pension instead. Personal pensions arranged in this way are called 'group personal pensions'. The charges may be lower because of the number of people involved, and the employer may also agree to pay extra contributions on top of what you pay in.

Your employer can contribute to different types of pension scheme, including stakeholder and personal pensions, as well as occupational schemes. If you are thinking about taking out a stakeholder pension or a personal pension, you should ask your employer if they would contribute to it. If you are already paying into a personal pension, find out what charges you may have to pay if you decide to transfer to a different scheme. Some people may be better off staying with their existing scheme.

If you are not sure what to do for the best, seek advice from an independent financial adviser.