How to feather your own pensions nest
A revolution in financial services is in the making. By Brian Tora
Permanent health insurance, death-in-service benefits (or their equivalent) and pensions will all need to be bought, offering opportunities for financial advisers. Uppermost in the minds of the self-employed will be pensions.
It is too early to say how far the shift from corporate to self-employment will go, but job security has been declining and there is an increasing tendency for people to have more than one employer during their working lives. This complicates pension provision.
Anyone who has changed jobs knows that transferring pension rights from one company to a new employer is not always the right course of action.
Increasingly, workers are making their own arrangements for pension provision, or arranging for a former employer's pension contributions to be transferred into a personal plan.
But these personal pensions carry two potential disadvantages. First, they are by definition money purchase schemes. That is to say the pension provided will depend upon how much money is available, which in turn depends on the performance of the underlying fund. Performance varies considerably. Over the past 25 years a personal pension invested in the best managed fund would deliver around five times the income of the worst performing fund - an alarming discrepancy.
Moreover, the cost of managing these pension plans can be quite high. The charges involved in personal pension provision can often take the edge off performance and will accumulate over a period of time to represent quite a tidy sum.
For those keen to avoid these pitfalls, a new option is growing in popularity. The self-invested personal pension (Sipp) has been around for a few years, but it has only recently begun to attract widespread support.
The concept is simple. An insurance company provides the package into which the Sipp contributions are placed, and the person whose pension it is makes arrangements for the management of the money.
For those interested and capable of making their own investment decisions, this can mean taking the decisions on the portfolio yourself. But for the most part Sipps are looked after by professional investment managers, able to tailor investment strategy to suit the needs and aspirations of the individual.
This can be important. If you are in a final salary scheme, the investment strategy adopted by the managers will reflect the objectives set by the trustees.
Actuaries guide the managers on how to balance the portfolio so that existing and future pensioners' positions are adequately protected.
For personal pensions, though, no such overview exists. Determining the strategy can be complex. Yet most people buying a straightforward managed fund will have the same underlying investmentswhether they invest their money into a scheme 30 years before taking benefits or just three.
One advantage of a Sipp is that you can start to build a more risk-averse portfolio as you approach retirement and avoid the consequences of having to cash in when market conditions are unfavourable.
The investment strategy can also take into account the possibility of phased retirement - whereby you take your pension benefits gradually, rather than all at once - and the new facility of taking income from the capital, instead of buying an annuity.
But Sipps are not suitable for everyone. Few managers would recommend setting up a Sipp with less than pounds 100,000, unless you had many years of contributions ahead of you. Even then, pounds 50,000 is likely to prove an absolute minimum. Also, appointing an individual investment manager is not necessarily a guarantee of riches. All it does is give you much greater understanding of what actually goes on and direct access to the fund manager.
The market leader in the provision of Sipps is Winterthur, part of the Swiss insurance giant. It dominates the market and has a competitive charging structure. On to that you must add the costs of independent pension advice and the investment manager.
In these competitive days it is usually possible to negotiate for investment management at a rate of as little as 0.5 per cent on sums of pounds 100,000 to pounds 250,000 - perhaps lower for larger amounts.
On top of that there would be transaction commission, of course. Some stockbrokers will even manage a Sipp for commission alone.
Six-figure sums are not unusual in the personal pensions market. Often the transfer value for someone in well-paid employment, with 15 or 20 years' service, can amount to a six or seven figure sum.
A 50-year-old who is not in an employer's scheme and is anxious to bolster a pension ahead of retirement, can contribute 25 per cent of relevant earnings each year. For those just into the 40 per cent tax bracket, this can be a cost-effective way of accumulating capital for the future.Once it was said that the biggest asset you were likely to own is your house. Now it could well be your pension fund. And how it performs will govern how well you live in retirement.
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