Personal Finance: Get to know each other before getting hitched

The success of any relationship with a pension provider is in the detail. Beware the small print, in which big charges can lurk.

By now everyone must know about the need to make adequate pension provision. Anyone offered membership of an occupational scheme is likely to be better off taking up the offer.

But for the self-employed and those in unpensioned employment, a personal pension is the only option. These carry generous tax breaks, but care is needed in matching a plan to your circumstances.

"The first real issue is the structure of the contract," warns Gillian Cook, a senior pension consultant with the actuaries Bacon & Woodrow. "It is easy to miss the detail of this if your eye is caught by a glossy brochure or big claims about past fund performance."

Finding a contract with conditions that fit your likely career pattern and earnings is vital. "Fewer and fewer of us stay with one employer, and many more white-collar workers now opt for self-employment," says Ms Cook. "Also, real earnings can peak far earlier, then decrease long before retirement."

So it is important to find a contract flexible enough to let you vary and suspend contributions without being penalised. The penalties in question nearly always result from the basis on which your adviser or pension provider is remunerated for any advice they give you when you choose a plan.

"Start by deciding whether you are going to pay commission or fee for advice, or whether you are "going it alone" and opting for a "low cost" plan where no advice is offered and no corresponding charges made," says Ms Cook.

Some type of commission basis is still most common, which makes an understanding of the complex and opaque system of commission-related charges very important.

Most providers offer "unitised" funds with a "bid-to-offer spread" typically of 5 per cent. The bid price is that at which you buy funds, the offer price that at which you redeem them. Typically, for every pounds 100, the spread will reduce the real value of your holding to pounds 95.

Next you can expect a monthly "policy fee" of between pounds 2.50 and pounds 4.50,which is a fixed charge made by the provider for administering the policy. This is deductible from your premium before it is invested.

Remember, these charges are not directly related to the amount you invest. "Why have two pounds 20-a-month plans each charging pounds 3 per month, or a total of pounds 6, if you could have one pounds 40-a-month plan charging pounds 2.50?" asks Ms Cook. "It is easy to forget that these fixed costs cut the final value of your fund."

Next is an annual charge for running the pension fund of between 0.5 and 1.5 per cent of the fund value. You will not notice these charges; they are deducted before you receive a statement of fund performance.

And then there's the "allocation rate", which affects both the actual amount of your premium invested and when during the policy term this happens. Care is needed; do not confuse allocation rates with bid-to-offer spreads. The two are independent of each other.

Take an example. You may be offered a plan with a regular allocation rate of 95 per cent and a bid-to-offer spread of 5 per cent. What this actually means is that only 90 per cent of your premium is finally invested into your fund of choice.

But you may be offered an "enhanced" allocation rate of 105 per cent, with a bid-to-offer spread of 6 per cent. In this case 99 per cent of your premium will be invested.

Some providers also make a distinction between so-called "capital" and "income" pension fund units. The distinction is important if you stop contributions early or wish to transfer your plan.

Capital units carry in-built penalties designed to meet the cost of any commission due to an intermediary regardless of whether you continue the plan. For instance, Barclays Life sells a plan with a bid-to-offer spread of 5 per cent, a 1 per cent management charge and a capital levy of 6 per cent over its first 12 months. Therefore net premiums actually invested for the first year of the plan could be reduced by approximately 12 per cent of their value.

You have the right to transfer any fund value you have built up between providers but should take qualified advice before doing so. "It is easy to be confused by the complexity of charging structures and lose as much as you gain," warns Ms Cook. "Ask for a clear statement of the costs and their impact on estimated fund growth."

One way to minimise these costs is by opting for a plan which pays commission on a level rather than a front-loaded basis, spreading the amount deducted from premiums for commission payments over the policy term rather than, as is the case with front-loaded plans, over the first 12 months.

Finally Ms Cook warns: "Recent changes to the treatment of advanced corporation tax mean that pension fund growth will be reduced by between 0.2 and 0.25 per cent a year. If you have not yet increased your contributions to compensate for this change, then think about doing so now, by between 10 per cent and 15 per cent."

peopleFrankie Boyle responds to referendum result in characteristically offensive style
Life and Style
Couples have been having sex less in 2014, according to a new survey
New Articles
i100... with this review
Holly's review of Peterborough's Pizza Express quickly went viral on social media
footballTim Sherwood: This might be th match to wake up Manchester City
Arts and Entertainment
musicHow female vocalists are now writing their own hits
New Articles
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
musicBiographer Hunter Davies has collected nearly a hundred original manuscripts
Blahnik says: 'I think I understand the English more than they do themselves'
Arts and Entertainment
Michelle Dockery as Lady Mary Crawley in Downton Abbey
TVInside Downton Abbey series 5
Life and Style
The term 'normcore' was given the oxygen of publicity by New York magazine during the autumn/winter shows in Paris in February
fashionWhen is a trend a non-trend? When it's Normcore, since you ask
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.

iJobs Job Widget
iJobs Money & Business

Senior BA - Motor and Home Insurance

£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

Market Risk & Control Manager

Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Head of Audit

To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

Day In a Page

Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam