Individual Pension Plans
An individual or personal pension plan, as the name implies, is a plan that you arrange yourself, not via an employer. A good individual pension plan will give you more options, often including:
· the choice to retire when you want to, without penalties;
· the flexibility to phase out work gradually, rather than sudden retirement;
· the opportunity to reduce or suspend your contributions.
If you are your own boss or move jobs quite frequently, arranging your own pension plan is often the most flexible option.
What are the costs involved?
Unlike company pension schemes, which often pick up the tab for administering and setting up the pension scheme, you will have to cover these costs. The level of charges, choice of funds, and additional benefits will differ between different product providers. Most new pension plans have charges and terms similar to Stakeholder.
The amount you pay for this type of policy usually correlates with the investments you choose. Typically, the cheaper option is select providers that invest in their own funds. If the provider offers you access to other providers’ funds, the charges rise slightly. Choosing specific investments, like individual company shares, will generally be the most costly.
When you retire your pension pot, accumulated over the years, is used to purchase an annuity, which will pay you a regular income.
You may have heard about stakeholder schemes, introduced by the Government in 2001. This low-cost scheme aimed to make pensions more accessible to people that can only set aside small amounts regularly.
The rules are the same as for Individual Pension Plans but the products must meet specified rules:
· minimum payment required must be no greater than £20;
· the charges must add up to no more than 1.5% of the fund value each year;
· the provider cannot charge for stopping or re-starting your payments or for transferring your fund to another provider.
In reality, most individual pension plans will meet these rules whether they advertise the plan as a stakeholder or not. However, only true stakeholder plans are prevented from changing the terms and future charges.
What else should I know about individual pensions?
The tax relief is the biggest benefit of pension schemes. Every £1,000 contribution will in real terms only cost you £800, as the tax man chips in the rest. Higher rate tax payers can claim back an additional 20 per-cent, giving you a £1,000 for your £600 contribution.
Another advantage is you can take out a stakeholder pension plan, even if you don’t earn an income, something that individual pension plans won’t allow. Grandparents and parents can even open a stakeholder pension for children, investing a maximum of £2,880 in each tax year, which is topped up to £3,600 by the Government through basic tax relief.
Specialist pension plans
There are other, more specialised, types of individual pension policies available. The key is to understand clearly the charges and risks involved in each plan. As with any form of investment, seeking advice to source the most suitable option for your needs is wise.