How to feather your own pensions nest

A revolution in financial services is in the making. By Brian Tora

A revolution is taking place in the financial services industry.The growing number of contract workers, either working from home or "hot desking" in technology centres, are having to buy the protection normally provided by big companies.

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.

News
A cleaner prepares the red carpet for the opening night during the 59th International Cannes Film Festival May 17, 2006 in Cannes, France.
newsPowerful vacuum cleaners to be banned under EU regulations
Arts and Entertainment
Loaded weapon: drugs have surprise side effects for Scarlett Johansson in Luc Besson’s ‘Lucy’
filmReview: Lucy, Luc Besson's complex thriller
Voices
Mosul dam was retaken with the help of the US
voicesRobert Fisk: Barack Obama is following the jihadists’ script
News
people
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
News
A polar bear’s diet is rich in seal blubber and half of its own body weight is composed of fat
i100
Life and Style
fashion David Beckham fronts adverts for his underwear collection
Travel
Flocking round: Beyoncé, Madame Tussauds' latest waxwork, looking fierce in the park
travelIn a digital age when we have more access than ever to the stars, why are waxworks still pulling in crowds?
Arts and Entertainment
Jeremy Clarkson has rejected criticisms of his language, according to BBC director of television Danny Cohen
tv
Extras
indybest
Arts and Entertainment
Judi Dench appeared at the Hay Festival to perform excerpts from Shakespearean plays
tvJudi Dench and Hugh Bonneville join Benedict Cumberbatch in BBC Shakespeare adaptations
Arts and Entertainment
tv
Sport
Is this how Mario Balotelli will cruise into Liverpool?
football
Finacial products from our partners
Property search
Love but not marriage: property is one area where cohabiting couples are in danger of losing out

How couples can protect their financial interests when cohabiting

People who simply live together cannot assume they have the same rights to each other's assets as spouses or civil partners. Michelle McGagh sees how they can protect their financial interests

India could be jewel in the crown for investors

With a new government and an ambitious prime minister, the country offers the prospect of strong returns. But there may be hiccups ahead, warns Simon Read

Child Maintenance Service to replace Child Support Agency - but is it better?

Reforms to the vexed question of child support payments by absent parents mean extra charges for both sides. Neasa Macerlean reports

Barclays's new life insurance heralds a revolution on the high street

The new product marks a shift towards 'clear, straightforward and standardised' banking products, says Simon Read

How to protect your assets if the stock markets begin to head south again

Are you worried about your portfolio? Nick Paler asks fund managers and investment insiders for advice
Fuel poverty campaigners united in criticising the delays in helping those in fuel poverty

Plans to tackle fuel poverty are slammed by campaigners

Charities and action groups believe that the Government's proposals are woefully inadequate
Sell it with flowers: competition is 'intense' for homes with outside spaces

Gardens add a tenth to the value of your home

A London estate agent yesterday put a price on having a garden. David Pollock of Greene & Co reckons it can increase a property's value by a tenth.

Spectators at the Isle of Wight music festival watch the World Cup on the big screen. Betting promotions were a feature of the tournament
Lenders have been accused of persuading vulnerable people to borrow expensive credit

Payday loan firms accused of bombarding vulnerable people with nuisance phone calls

Payday loan firms have been accused of bombarding financially vulnerable people with nuisance phone calls, after a debt charity reported that a third of its clients were plagued by the messages.

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Service Desk Analyst (Graduate, Helpdesk, Desktop, Surrey)

    Negotiable: Harrington Starr: Service Desk Analyst (Graduate, Helpdesk, Deskto...

    Service Desk Analyst (Graduate, Helpdesk, Desktop, Surrey)

    Negotiable: Harrington Starr: Service Desk Analyst (Graduate, Helpdesk, Deskto...

    Junior Quant Analyst - C++, Boost, Data Mining

    £25000 - £35000 per annum: Harrington Starr: Junior Quant Analyst - C++, Boost...

    Service Desk Analyst- (Desktop Support, Help desk)

    £25000 - £35000 per annum: Harrington Starr: Service Desk Analyst- (Desktop Su...

    Day In a Page

    Air strikes? Talk of God? Obama is following the jihadists’ script

    Air strikes? Talk of God? Obama is following the jihadists’ script

    The President came the nearest he has come yet to rivalling George W Bush’s gormless reaction to 9/11 , says Robert Fisk
    Ebola outbreak: Billy Graham’s son declares righteous war on the virus

    Billy Graham’s son declares righteous war on Ebola

    A Christian charity’s efforts to save missionaries trapped in Africa by the crisis have been justifiably praised. But doubts remain about its evangelical motives
    Jeremy Clarkson 'does not see a problem' with his racist language on Top Gear, says BBC

    Not even Jeremy Clarkson is bigger than the BBC, says TV boss

    Corporation’s head of television confirms ‘Top Gear’ host was warned about racist language
    Nick Clegg the movie: Channel 4 to air Coalition drama showing Lib Dem leader's rise

    Nick Clegg the movie

    Channel 4 to air Coalition drama showing Lib Dem leader's rise
    Philip Larkin: Misogynist, racist, miserable? Or caring, playful man who lived for others?

    Philip Larkin: What will survive of him?

    Larkin's reputation has taken a knocking. But a new book by James Booth argues that the poet was affectionate, witty, entertaining and kind, as hitherto unseen letters, sketches and 'selfies' reveal
    Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?

    Waxing lyrical

    Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?
    Texas forensic astronomer finally pinpoints the exact birth of impressionism

    Revealed (to the minute)

    The precise time when impressionism was born
    From slow-roasted to sugar-cured: how to make the most of the British tomato season

    Make the most of British tomatoes

    The British crop is at its tastiest and most abundant. Sudi Pigott shares her favourite recipes
    10 best men's skincare products

    Face it: 10 best men's skincare products

    Oscar Quine cleanses, tones and moisturises to find skin-savers blokes will be proud to display on the bathroom shelf
    Malky Mackay allegations: Malky Mackay, Iain Moody and another grim day for English football

    Mackay, Moody and another grim day for English football

    The latest shocking claims do nothing to dispel the image that some in the game on these shores exist in a time warp, laments Sam Wallace
    La Liga analysis: Will Barcelona's hopes go out of the window?

    Will Barcelona's hopes go out of the window?

    Pete Jenson starts his preview of the Spanish season, which begins on Saturday, by explaining how Fifa’s transfer ban will affect the Catalans
    Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

    We know all too much about the cruelty of Isis – but all too little about who they are

    Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
    Neanderthals lived alongside humans for centuries, latest study shows

    Final resting place of our Neanderthal neighbours revealed

    Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
    Scottish independence: The new Scots who hold fate of the UK in their hands

    The new Scots who hold fate of the UK in their hands

    Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
    Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

    Blight club: Britain's ugliest buildings

    Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape