Getting started with a Pension

Parm

Hi all,

I'm new to the forums but I've recently discovered this website and found it to be extremely useful. I've never organised my money, and to be truthful, I've usually spent it!

However, now aged 25, I've started to get a grasp on my finances and have realised the need to plan ahead. Over the past six months or so, I've cleared all my debts and having read guides on this site, I've started saving in an ISA and I've began to better manage my credit cards and bank accounts.

Now, the next thing I'd like to do is sort out a Pension. At age 25, I've never had one and realise the need to get one sooner rather than later.

The trouble is, that although most of the savings stuff I've read so far seems self explanatory, Pensions are anything but.

I'd like to save around £100 per month to start with, but I'm not sure of where exactly to get started. Having read the Pensions guide on the website, my understanding is that I should opt for something like a Stakeholder pension, and that I should apply for one via an online site such as Cavendish Online to avoid hefty commision charges.

However, I'm still sketchy on Pensions on the whole and any advice would be greatly appreciated. As a 25 year old looking to put £100 a month aside, can anybody suggest what I should be looking for in a Pension and perhaps lead me in the right direction?

Thanks in advance!

dunstonh

Having read the Pensions guide on the website, my understanding is that I should opt for something like a Stakeholder pension

This is perhaps a good example of where Martin needs to be careful about his articles. £100pm, age 25 and picking stakeholder means you are picking a more expensive contract than others available and one that has a lower investment choice than the alternatives.

I should apply for one via an online site such as Cavendish Online to avoid hefty commision charges.

What hefty commission charges are these? At your age, an IFA could take maximum commission and still come in cheaper than Cavendish on execution only.

However, I'm still sketchy on Pensions on the whole and any advice would be greatly appreciated. As a 25 year old looking to put £100 a month aside, can anybody suggest what I should be looking for in a Pension and perhaps lead me in the right direction?

A pension is a tax wrapper. A container for investments with a defined maturity process (i.e. income provision in retirement). A pension will not make or lose money. it is the investments you place inside it that do that. You have tens of thousands of investment options so the priority should be how and where to invest and then find the best provider and type of pension that meets your requirements.

A stakeholder at age 25 is a simple option, with simple funds but it is not the best option and it is not the cheapest option. Just the simple option. Is that what you want?

Parm

Thanks for the prompt response dunstonh.

The simple option isn't entirely what I'm after. Granted, a simple solution is always appealing, but what are the better options?

dunstonh

The issues i have with that article are:
1 - the NU stakeholder pension mentioned is no longer available for new business (so the figures are wrong)
2 - the old NU stakeholder used the highest charge possible for a stakeholder so it made the IFA example look much more expensive than a nil commission option (the new NU stakeholder is cheaper). It was like picking the most expensive IFA option and comparing it against the cheapest discount option.
3 - personal pensions can be cheaper than stakeholder. Especially when you have more than 20 years to go until retirement. (i gave an example on a thread recently where an IFA taking full commission using a personal pension on the terms in the article only came out in second place compared to the others in the article. An IFA on fee basis would come in cheapest).

Stakeholder is simple to understand as it has a defined charging structure (within certain tolerances). Personal pensions have no rules on charging structures which means variety of methods. The two main methods are:

1 - match stakeholder for stakeholder funds but also include external funds which may cost more but offer better investment potential
2 - have an upfront charge (usually taken over the first year or so) but after that have a much lower annual management charge. Also includes external funds as well as internal funds.

The 2nd option is a newer option. Its designed for IFAs working on fee basis more than anything else. You agree a fee with the IFA. The IFA can then take that fee from the pension (meaning you get tax relief on the fee) but as its not commission, the annual managment charge is much lower. With those with longer terms to retirment, this type of plan can be cheaper than the execution only plans you have seen mentioned in Martins article. These plans also tend to have fund based discounts as well which further improve terms. The second option is more expensive in the early years but cheaper in the long run.

The problem with stakeholder pensions is they include internal funds only (i.e. bank funds or insurance company funds) and they are typically not very good (obviously some exceptions and insurance companies do tend to be quite good at the lower risk end but awful at the medium risk or higher end). The range of investment options are going to be limited and you are going to have to compromise on where you invest.

External funds cost a bit more but give you a wider range of investment choice (China, India, Emerging Markets, focused areas such as Commodities, property share etc) as well as external fund houses such as Fidelity, Gartmore, Invesco Perpetual etc. You can build a much better investment spread with a personal pension.

What you have to decide is whether you want quality of investments or simplicity. If you intend to invest and forget then a stakeholder is the best way to go (although one of those cheaper personal pensions would be ) but you have to consider that it may not achieve as much growth as when a portfolio is monitored and rebalanced. If you want quality and want a monitored and rebalanced portfolio then you then need to decide if you are doing to do that yourself or you need someone else to do it.

Once you know what you want then the options can be limited down.

EdInvestor

If you are a basic rate taxpayer and have no company pension option, you may be better at this stage to max out your annual stocks and shares ISA allowance, as well as the cash part and leave the pension until later.

Se the "Pension vs ISA" sticky at the top of the forum for the pros and cons.

Dick_here

Do we know if there is a company pension option ? I don't think so. If there is, ignore everything else that you've read and join it ! Simple.