Comparing pensions

More and more people, worried about the future value of state pension and work pensions, are thinking about joining a private pension scheme.

If that sounds like you, take 10 minutes to check out your options.

Before you begin: Know what you want to achieve
Start by working out what pension(s) you're already in (if any), and what they are likely to be worth to you when you retire (you may have statements that provide an illustration of future worth). Have a think about the sort of retirement income you think you'll need, and how much you can afford to save each month.

You may want to talk through the issues around private pensions with an independent financial adviser, ideally one who specialises in personal pension planning. This article should help you understand what they're on about!

Step 1: Swot up on the basics
With a private pension, you usually pay either a regular monthly amount or a lump sum to a pension provider who invests it in a fund on your behalf.

You can buy a private pension plan from financial organisations like building societies, banks and insurance companies.

The final value of your pension pot will depend on how much you have contributed and how well the fund's underlying investments have performed.

Saving in a private pension plan is tax-efficient. Money is paid in before income tax is deducted, so at current rates every £100 invested costs you £78 if you're a basic rate taxpayer and £60 if you pay tax at the higher rate.

Step 2: Know the difference
There are two main types of private pension:
- Personal
- Stakeholder

The main difference is that with stakeholder pensions the charges are limited and you can transfer investments between funds and providers. However, the choice of investments tends to be narrower, though this is now changing.

Personal pensions offer a wider range of funds in which to invest.

Step 3: Choose your investments
There is a huge range of personal and stakeholder pension plan providers and there are hundreds of individual plans to choose from.

Broadly speaking, plans offer a choice of funds to invest in, usually based around stocks and shares, and the value of your pension pot will rise and fall in line with the value of the underlying investments.

You can choose your own investments with Self-Invested Personal Pensions (SIPPs), but most people opt for managed funds such as unit trusts or with-profits plans. Managed funds invest in a range of investments with the size of your pension pot depending on the provider's profits and added bonuses.

Which fund you choose will largely depend on your attitude to risk - the higher the risk, the higher the likely return - or loss! But you can also choose to invest only in ethical funds that screen out companies that don't behave in a socially responsible way.

If you don't want to make the decision yourself, many pension providers can choose a fund for you, depending on your level of risk, age and other key factors.

Step 4: Check the charges
Pension providers charge you for starting up and running your pension. These charges are normally deducted from your fund.

The charges for stakeholder pensions are fixed at a maximum of 1.5% of the fund each year, falling to one per cent after 10 years. Although many personal pensions have reduced their charges in line with stakeholder pensions, it's important to check at the outset, as charges can take a sizeable chunk out of your pension pot over the years.

Step 5: Check on penalties and restrictions
If you stop working for a while or take a cut in income then it's useful to be able to suspend payments for a while, or reduce them, without penalty. Check too whether there are any restrictions or penalties if you want to transfer your funds.

Step 6: What about my employer's pension scheme?
Occupational pension schemes are generally a good deal; not only does your employer make contributions into the scheme but often they pay the management fees too.

Your contributions to your occupational pension scheme are deducted from your earnings before income tax is worked out. This means you automatically get tax relief up to your highest tax rate through the PAYE system.

Step 7: Boost your benefits
With an occupational pension you can top up your benefits by making additional voluntary contributions (AVCs) and still get tax relief on them. Ask your company about its AVC scheme, or look into paying freestanding AVCs (FSAVCs) into a private pension plan.