Money: How to make your pension pay

Pensions are a topic of confusion and controversy for many. Andrew Couchman asks a few pertinent questions

ALMOST one million people took out a personal pension plan last year. Many more have existing plans or are members of an occupational scheme. Here we set out 10 questions to ask your pension provider to help ensure that you have the right pension, and that it will deliver what you expect it to.

What sort of pension scheme or plan is this?

Pension plans fall into personal and company set up (or occupational) categories. Personal pensions are the simplest in concept. You decide how much you want to pay in each month, and the benefits when you retire depend on how well the insurance company's investments do and on the annuity rate (the annual income payable on your capital) when you retire.

In the past it often made sense to pay single or one-off premiums, because charges were lower than on small regular contributions, but as insurers have been stung by criticisms of over-charging and mis-selling, so value for money has generally improved. Executive pensions are set up by your employer but are personal to you. Both personal and executive pensions are money-purchase schemes. The premiums are a fixed amount and benefits are determined by investment performance. Occupational schemes cover a group of employees, and are usually set up to provide a percentage of your final salary on retirement.

How much is this costing me?

As well as what you pay in, your employer may also contribute, and on personal and executive plans there will be charges to pay. If so, you want to know what those charges are and, if you have a choice, whether you can get a better deal elsewhere?

Insurers are past masters at complex charging structures, so seek expert advice before taking any action you might regret later.

How good is your investment performance?

That does not matter on some occupational schemes that are linked to your final salary, as your employer is happy to go on paying. But it does for so-called "money-purchase", plus personal and executive plans. Performance will depend on the type of fund you invest in, where that fund invests and how much comes out in the charges.

The best way to check fund performance is by reference to one of the specialist personal finance magazines. Planned Savings and Money Management are the two top monthlies. Insurers may provide you with glossy graphs and tables confirming their performance, but you need to compare like with like, and look at a range of investment periods and the relative risk of the fund.

How much is pensions mis-selling costing, and who pays?

Pensions mis-selling has cost insurers billions of pounds, in both compensation and, for some, fines from their regulator. In the latter case, many insurers simply under-estimated the difficulty of the exercise, or were too slow to allocate the necessary resources. Some have now learned the hard way that the Treasury is serious when it says that excuses will not be tolerated.

The Prudential is currently under pressure because it is feared that its policy-holders rather than its shareholders will end up paying for the compensation. In reality, customers usually end up paying - a good reason why cost-effective regulation is something we should all be more interested in.

When can I retire, and how much will I get?

This is the key question. You want to know how much of a tax-free cash lump sum and how much income you will get, when you will get it and whether the figures are guaranteed. Most pension providers now let you choose which insurer will provide the annuity (income) at retirement, but with occupational schemes you do not get a choice as your pension income comes out of the scheme itself.

Can I buy more life assurance through my pension?

Buying life assurance through your pension is the cheapest way to buy it, because you get tax relief on what you pay in. With executive and occupational pensions, you can have life cover up to four times the value of your income, including benefits in kind such as a company car and any regular bonuses or overtime. Even if the scheme provides lower cover, you can often pay to have more. A pension will be payable to your dependants, but check how much.

What disability pension do I get if I cannot work because of illness or disability?

Many employers will pay full salary for just a few months, and any ongoing pension could be very small. If you don't like what you are told, ask if you can obtain better cover. If your employer has an insured income protection or permanent health insurance scheme, ask whether it includes a continuation option so that you can continue the cover even if you change employers later.

Can I buy extra pension benefits, or retire early?

If you change jobs, retire early or have benefits in kind, it is very unlikely that you will get maximum benefits from your employer unless you pay more.

That may be possible through additional voluntary contributions (where you pay more into your company scheme) or through freestanding additional voluntary contributions, where you pay into a separate insurance policy. The latter may provide poor value for money, especially if you only pay a few pounds each month.

What happens if I leave?

Despite improvements in recent years, occupational schemes still usually favour those who stay with the same employer until retirement. Do not be tempted to switch from a company scheme to a personal pension to improve things (that was what the pensions mis-selling scandal was all about) unless the reasons to do so are compelling, you understand precisely the downside as well as the benefits, and you get good, unbiased advice.

What happens when I die?

You want to know how much your heirs will get, and who will get it. Your scheme trustees will usually have a trust arrangement, so that your beneficiaries will get the money free of inheritance tax, but it makes sense to tell them your wishes, particularly if there are any previous partners or children to consider.

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search

Payday lender Cash Genie forced to repay £20m to ripped-off customers

The high-cost credit company preyed on vulnerable people struggling because of the recession

Mark Carney warns that the decision is likely to come into 'sharper relief' by 'the turn of the year'

An interest rate rise may be on the way - act now to secure a better mortgage deal

Competition has driven rates down but they could start drifting upwards

Santander 123 is attractive for those seeking interest on credit balances

Switching your current account? Pick one that reflects the way you run your finances

Andrew Hagger has carried out some research to try to establish which accounts are strongest in each of the different areas

A reader hit trouble after booking accommodation in a St Andrews hostel for the Open

Questions of Cash: 'Golfing break landed in the bunker when the price on the booking site was way below par'

One reader encountered a problem when booking accommodation at the St Andrews Tourist Hostel through HostelBookers

The Money Shop this week became the latest payday lender to have an ad banned

Payday lenders slammed for 'misleading' claims: charities say they're still not doing enough to help borrowers

Debt charities say there seems scant evidence to back up CFA's latest report

The crooks, like these in the 1955 film The Ladykillers, are waiting in the shadows as people cash in their savings

Savers are embracing their pension freedom ... and so are the scammers

There have been fresh warnings that scammers are trying to trick people into using liberated cash to invest in dodgy schemes

Don't get burnt: holidaymakers should check their plastic

How to avoid costly debit or credit card charges on overseas trips

Taking the wrong plastic can be a costly mistake, leaving you paying over the odds for your holiday spending money to the tune of £68, maybe more

From as far back as the Seventies, women have been drawn to the tables, attracted by the sense of feeling like a celebrity

Gambling is on the rise - so is enough being done to combat problem betting?

More and more of the 'AB' classes are joining the vulnerable in playing the odds, as Neasa MacErlean reports
No sunshine: Not all pensioners will be as happy as these women

Freedom reform leads to £1.8bn run on pension pots

But the right of over-55s to withdraw their retirement nest-eggs opens the door to scammers.

Mark Carney; '[there is] no immediate need to increase interest rates'

Interest rates: five things you need to know about a rise in rates by the end of the year

Mark Carney said the decision to raise interest rates was likely to come by 'the turn of the year'

Viagogo struck a discordant note when tickets for Ed Sheeran didn’t arrive

Viagogo withdraws tickets from sale the day before Ed Sheeran's concert, and the story repeats

Ticket frustration a go-go as gig-goers are let down again. Funny how bad publicity helps 

Just 39 per cent of 25-45 year-olds own a home in London, which has the lowest rates of young homeowners in the country (Getty)

Have you been given the wrong mortgage? City Watchdog says it is 'unclear' why two-fifths of loans were recommended

Stringent new rules were supposed to stamp out mortgage mis-selling, but only 59% of mortgage borrowers were given suitable advice

ATM access is to be investigated

The 'bank calls' suggesting to move the cash into the 'safe' account might steal your money

The alarm bells are ringing over 'no hang-up' fraud

Rip-off energy prices are here to stay, even though watchdog has slammed the Big Six

Big firms are skilled at increasing profits while millions struggle with fuel poverty

High costs on the high street: the largest players in British banking may not have enough incentive to be competitive

If a bank calls about transferring money because of fraud, you risk losing your life savings

A retired nurse lost £14,000 to unscrupulous rogues

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

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Guru Careers: Financial Controller

    £45 - £55k DOE: Guru Careers: A Financial Controller is required to join a suc...

    Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

    £12500 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

    Recruitment Genius: Sales Adviser - OTE £24,500

    £22500 - £24500 per annum: Recruitment Genius: Inbound and outbound calls with...

    Recruitment Genius: Business Development Executive / Sales - OTE £40,000

    £18000 - £40000 per annum: Recruitment Genius: This fast growing Insurance Bro...

    Day In a Page

    Mullah Omar, creator of the Taliban, is dead... for the fourth time

    Mullah Omar, creator of the Taliban, is dead... again

    I was once told that intelligence services declare their enemies dead to provoke them into popping up their heads and revealing their location, says Robert Fisk
    Margaret Attwood on climate change: 'Time is running out for our fragile, Goldilocks planet'

    Margaret Attwood on climate change

    The author looks back on what she wrote about oil in 2009, and reflects on how the conversation has changed in a mere six years
    New Dr Seuss manuscript discovered: What Pet Should I Get? goes on sale this week

    New Dr Seuss manuscript discovered

    What Pet Should I Get? goes on sale this week
    Oculus Rift and the lonely cartoon hedgehog who could become the first ever virtual reality movie star

    The cartoon hedgehog leading the way into a whole new reality

    Virtual reality is the 'next chapter' of entertainment. Tim Walker gives it a try
    Ants have unique ability to switch between individual and collective action, says study

    Secrets of ants' teamwork revealed

    The insects have an almost unique ability to switch between individual and collective action
    Donovan interview: The singer is releasing a greatest hits album to mark his 50th year in folk

    Donovan marks his 50th year in folk

    The singer tells Nick Duerden about receiving death threats, why the world is 'mentally ill', and how he can write a song about anything, from ecology to crumpets
    Let's Race simulator: Ultra-realistic technology recreates thrill of the Formula One circuit

    Simulator recreates thrill of F1 circuit

    Rory Buckeridge gets behind the wheel and explains how it works
    Twitter accused of 'Facebookisation' over plans to overhaul reverse-chronological timeline

    Twitter accused of 'Facebookisation'

    Facebook exasperates its users by deciding which posts they can and can’t see. So why has Twitter announced plans to do the same?
    Jane Birkin asks Hermès to rename bag - but what else could the fashion house call it?

    Jane Birkin asks Hermès to rename bag

    The star was shocked by a Peta investigation into the exotic skins trade
    10 best waterproof mascaras

    Whatever the weather: 10 best waterproof mascaras

    We found lash-enhancing beauties that won’t budge no matter what you throw at them
    Diego Costa biography: Chelsea striker's route to the top - from those who shared his journey

    Diego Costa: I go to war. You come with me...

    Chelsea's rampaging striker had to fight his way from a poor city in Brazil to life at the top of the Premier League. A new book speaks to those who shared his journey
    Ashes 2015: England show the mettle to strike back hard in third Test

    England show the mettle to strike back hard in third Test

    The biggest problem facing them in Birmingham was the recovery of the zeitgeist that drained so quickly under the weight of Australian runs at Lord's, says Kevin Garside
    Women's Open 2015: Charley Hull - 'I know I'm a good golfer but I'm also just a person'

    Charley Hull: 'I know I'm a good golfer but I'm also just a person'

    British teen keeps her feet on ground ahead of Women's Open
    Turkey's conflict with Kurdish guerrillas in Iraq can benefit Isis in Syria

    Turkey's conflict with Kurdish guerrillas in Iraq can benefit Isis in Syria

    Turkish President Erdogan could benefit politically from the targeting of the PKK, says Patrick Cockburn
    Yvette Cooper: Our choice is years of Tory rule under Jeremy Corbyn or a return to a Labour government

    Our choice is years of Tory rule under Corbyn or a return to a Labour government

    Yvette Cooper urged Labour members to 'get serious' about the next general election rather than become 'a protest movement'