Step 44: Personal pensions

Step 44 of the 100 steps to financial independence: Personal Pensions
Step 44: Personal Pensions

If you aren’t enrolled in a workplace pension and don’t have the option to join one, it is worth considering setting up your own personal pension. And even if you have an occupational pension, you might still want to look into personal pensions either as an alternative, or in addition to your workplace pension. Of course, you don’t have to if your workplace pension offers you exactly what you need and how much you need anyway., but as with anything it is worth considering the different options, to know for sure you have chosen the option(s) that are most relevant to you.

A personal pension works in very much the same way as a workplace pension, with the exception that your employer usually won’t be required to make a contribution. Another difference is that you need to make more decisions. Not only do you have to choose a pension provider (whereas in the case of occupational pensions your employer would have already done this for you), you often also need to choose from different packages, conditions and investment options. 

Chosing your own pension plan means you have more flexibility to find one that meets your specific needs (or what you predict these to be in maybe many years), but it also means more work and research is required to find and compare options.

This at the same time can be a disadvantage of a personal pension: because you have far more control over this type of pension, you are also far more likely to be affected by news, hypes and market scares, meaning you might make emotional decisions that aren’t always in the interest of your pension in the long run. (for more on all of this see also the steps on investing).

Below is a list with some of the most important factors to look at when comparing pension offers:

  • Minimum payment – how much is this per month? Can you afford this? Is it a fixed contribution or can you vary your contribution if you are tight for money or if you don’t have a set income per month?
  • Maximum contribution – many schemes have an upper limit of monthly or yearly contributions one can make. How much are you looking to pay in?  Does the scheme allow you to do this or is there a lower cut off point?
  • Costs – what are the annual maintenance fees, transaction fees, administration fees, management fees and /or late-payment fees if you miss a payment (the costs come under a variety of names..!). It is important to consider the costs as even if they sound small to you know, they might over time add up to a lot.
  • Penalties – Pretty much all pension funds will also have a penalty if you decide to take your pension out earlier than what is agreed, so make sure to check how much this is too and whether it changes depending on how close to the agreed retirement age you are.
  • Investment options – Your money can be invested in a variety of ways, so you want to make sure that you feel content with the investments. Investments can be made with more or less risk, depending on the mix of stocks, bonds, money and other assets and since this is your pension we’re talking about, you want to be sure about how you money is managed and allocated.
  • Investment influence – How much can you influence the investments with time? Many pensions offer a lifestyle investment option, in which investments with time, when one gets closer to their retirement age are moved to lower-risk investments such as money or bonds. Others keep your portfolio allocation the same from beginning to end. Check whether you can change investments with time to better suit your needs and risk tolerance.
  • Withdrawals – How can you withdraw from this fund? When you get to retirement age, there are different ways to start drawing your pension, including: lump sums (either taking all of it in one go, or partial lump sums), a guaranteed regular set income or an annuity, a flexible income (where you take out a variable income depending on your needs), or a combination of the above. Each withdrawal option has its own advantages and disadvantages including tax advantages and possible risks such as protection against inflation and the possibility your money might run out before “the end”.

Step 44 – Personal Pensions – in detail

  • Look for private pension options online and get the key features of several schemes in order to compare them. Usually insurance companies offer a variety of options, but also look at other companies such as banks or specific pension scheme companies.
  • Ask friends, family, colleagues or acquaintances who you feel you can ask these questions about recommendations or experiences they have.
  • Think about what basic requirements a pension would need to meet by going through the checklist above. What are absolute key elements that you are minimally looking for?
  • Compare the various options, consider making a chart with the pros and cons, (have a look at step 40 for an example chart to compare).

We won’t be setting up a personal pension at this stage yet as we’ll look at determining on our final pension plan in the next step. But having all the options handy for now gets us ready to do the final comparison and to determine our plan of action.

Read more about my 100 steps mission to financial independence or simply decide to take control today and join us on our step-by-step quest on how to make your finances work for you, starting with step 1.

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