UK personal pensions

 describes how UK investors can use the UK pensions to support saving for retirement. UK pension regulations are designed to make investments in these plans long-term. While they can have other ancillary benefits, pensions overall are not suitable vehicles for other savings goals.

Introduction
Personal pensions are private pensions that you arrange yourself. You pay money into a pension fund which you use to buy a regular income when you retire.

These types of pensions are known as defined contribution pensions, and investors who hold them can direct investment decisions as required. The other main type of UK pension is a defined benefit pension, usually a workplace pension set up by an employer. In a defined benefit pension, all the investment and other financial decisions are taken by the pension trustees rather than by the individual.

Defined benefit pensions are now uncommon outside of the public sector. Employers often set up group personal or stakeholder defined contribution pensions for their employees.

Types of UK personal pension
The following personal pension types are available in the UK:
 * Stakeholder Pension
 * These have to adhere to strict government limits, mandating low charges and low minimum contributions. Over time, stakeholder pensions have fallen out of fashion because the charges on more general personal pensions and SIPPs has reduced so that they are now competitive at relatively low asset levels.


 * Personal Pension
 * These are pensions with limited but adequate fund choices. They operate without the restrictions of stakeholder pensions, and are usually offered by large insurance companies. Annual charges are generally modest, and they are a good choice for retirement savers with little or no interest in managing their investments themselves.


 * Self Invested Personal Pension (SIPP)
 * Most popularly offered by UK investment platforms, and behave as a simple wrapper around a vanilla-looking trading account capable of holding stocks, ETFs, funds or OEICs, and perhaps bonds directly. They range in price from economical to expensive. The more "boutique" varieties are pricey, but also support directly investing in things like property, private business ventures, and so on.


 * Employer Group Personal Pension (GPP)
 * These are personal pensions set up in partnership with an employer. The benefit is generally that the employer will make contributions to the pension as part of their payroll, making life convenient for retirement savers. There is also an employer match (of varying generosity). Transfers of other plans in is usually permitted. Transfer out may be permitted while still at that employer, and is certainly allowed when no longer employed by the partner employer.

The following sections suggest how to hold index tracker funds effectively and efficiently in these types of pension.

Personal pensions and stakeholder pensions
These pension types are typically offered by large life insurance companies such as Aviva and Aegon. Costs vary, but generally hover around the 0.3% to 0.5% level for everything (that is, the investment platform and the fund management). There may be additional charges for more specialist fund options.

The fund choices are likely to be limited, but are usually adequate. Often, the funds offered are 'rebadged' versions of retail level funds offered by the usual fund managers, for example 'Aviva Pension BlackRock 50:50 Global Equity'. BlackRock owns iShares, so even though this fund is superficially an Aviva pension fund, it would make a good holding for someone wanting a passive index tracker (in this case, one that is 50% UK stock and 50% ex-UK stock). BlackRock are a reputable index fund provider.

The pension provider will provide fund information for each fund offered, but it is sometimes hard to uncover. Life insurance company platforms are usually not as fully featured as the main UK retail investment platforms, but again are generally adequate.

Self Invested Pension Plans (SIPPs)
A SIPP is the easiest type of pension to manage when it comes to holding index tracker funds. The "mass-market" SIPP is the place to look. Costs are tolerably low, and the choice of investments will generally be OEICs and unit trusts, shares (including ETFs and investment trusts), and perhaps bonds or gilts directly.

Most mass-market SIPPs offer an extensive range of OEICs and full access to ETFs, meaning that it is easy to hold Vanguard, HSBC, Fidelity, and other index tracker funds and ETFs inside these SIPPs. The hardest part with them is usually trying to find the actual Vanguard or other tracker fund you want among the thousands of funds on offer.

Note that UK direct-to-customer investment platforms split into two general types: flat-fee; and percentage based. For low SIPP values a percentage based platform is acceptable, but for higher values, perhaps above £30,000 to £50,000 or so, the percentages become large amounts that compound hugely over a long timeframe, so that a flat-fee platform is usually preferable above these levels.

At the upper end of SIPPs are found expensive offerings that permit direct investment in property, private business enterprise, and so on. These are specialist options, and unless you want all of the bells and whistles they offer it will be better to stick with the cheaper retail SIPPs.

Employer Group Personal Pensions (GPPs)
Most sizeable employers offer a group personal pension scheme. This is a personal pension for each employee, owned and managed by that employee, but which the employer arranges. Employers will pay into these schemes via payroll, normally with some level of employer match to employee contributions.

An employer GPP is usually run by a life insurance company, so will generally resemble a vanilla personal pension as outlined above. Employers usually negotiate a discount with the provider, so that the charges on these are often lower than the headline rate if you went to the provider directly, perhaps as low as 0.2% or even less. This can be confusing where the provider offers only 'generic' fund documentation that shows 'indicative' charges of perhaps 1%; this makes the charges look much larger than they in fact are.

Managing withdrawals
The earliest age you can get a personal or stakeholder pension is usually 55, depending on your arrangements with the pension provider or pension trust. You don’t have to be retired from work.