If you want to contribute into a pension but your employer doesn’t offer a scheme, then you’ll need to turn to personal pensions.
And even if you have access to a money purchase occupational pension, you might still consider a personal pension if the occupational scheme offers no additional benefits (e.g. employer contributions or lower costs).
Personal pensions come in three flavours: stakeholder, plain vanilla and self-invested (SIPPS). The only tangible differences are underlying investment choice and charges.
Stakeholder pensions are usually the cheapest but tend to have the narrowest investment choice; between 2-40 funds depending on the provider.
SIPPs usually offer access to 1,500+ funds plus shares and other eligible investments such as gilts and corporate bonds, albeit at higher cost.
Plain vanilla personal pensions are more or less redundant these days as a stakeholder pension or low cost SIPP is likely to be better value depending on your needs.
1. Decide how much and how often you’ll want to contribute
If you simply want to contribute up to a few hundred pounds, either monthly or ad-hoc, then a stakeholder pension is likely to be your most cost effective option (the rules state a minimum contribution of £20, although a few providers accept less).
Most SIPPs, even low cost ones, have either annual and/or dealing charges that render monthly savings uneconomic on smaller pensions (the one potential exception is the Hargreaves Lansdown Vantage SIPP when buying funds, see ‘best buys below’).
For lump sums of £1,000 or more then some low cost SIPPs start to become economic.
2. Decide how important investment choice is to you
Bearing in mind the points above:
If you like to keep things simple and are happy choosing from a handful of funds that cover the main investment areas, then a good stakeholder pension should fit your needs. Go to 3.
If you take an active interest in investing and want access to a much wider choice of funds and/or want to hold shares then a low cost SIPP is likely to be more suitable. Go to 4.
If you’d also like to hold commercial property (e.g. your business premises) in your pension then you should consider a ‘premium’ SIPP. Charges will be much higher, but you should be able to hold any eligible pension investment. Go to 5.
3. Consider a stakeholder pension
The only allowed charge is an annual fee of up to 1.5% over the first 10 years and 1% thereafter. Given most stakeholder pensions charge more or less the same, you should base your decision on investment choice. Look for a good range of funds that meet your needs – there are some suggestions in the ‘best buys’ section below. Go to 6.
4. Consider a low cost SIPP
A low cost SIPP should charge very little, if anything, either initially or annually for the SIPP ‘wrapper’. Dealing costs when buying shares and other non-fund investments should be around £10 while fund initial charges should be zero (or close to). And check what you’ll be charged if you decide to move your pension to another SIPP provider in future.
You should expect to be able to purchase most eligible funds and shares in the marketplace, but always double check your desired investments are available. See the ‘best buys’ section below for some suggestions. Go to 6.
5. Consider a ‘premium’ SIPP
Expect to pay at least several hundred pounds both initially and annually for the SIPP ‘wrapper’. A premium SIPP is unlikely to be worthwhile unless a low cost SIPP and stakeholder pension don’t meet your specific investment needs.
6. Select the underlying investment(s)
Once you’ve selected a pension you effectively have an empty box in which to place investments. When choosing investments make sure they suit what you’re trying to achieve. For example, cash is likely to be a poor option if investing for the next 30 years, while putting everything in stockmarkets 5 years from retirement will be too risky for most. Read our investment section to learn more about investing.
Some ‘best buy’ Pensions
Legal & General Stakeholder Pension
Offers 23 of its own funds (mostly trackers) and 17 run by other managers including Aberdeen, JPM and Newton. Charges range from 0.8% to 1.15% a year, but can’t exceed 1% for the first 10 years. There’s enough choice to satisfy many investors and charges are reasonable versus other stakeholder pensions.
Scottish Widows Stakeholder Pension
Offers 23 of its own funds and 17 tracker funds run by other managers. Charges are 1% a year with a 20% discount for applying online which brings the cost down to 0.8%. It’s a good alternative to Legal & General, especially if you prefer trackers over active fund managers.
Low Cost SIPPs
If you will predominantly hold funds (paying trail commission) & your pension fund is below c£50,000
Hargreaves Lansdown Vantage SIPP
No initial SIPP charges and no annual charges either on funds that pay trail commission. If you hold shares, or funds that don’t pay trail commission (e.g. most trackers), the annual charge is 0.5% + VAT. The majority of funds have no initial charge but unlike the Vantage ISA there’s no trail commission rebate. Share dealing fees of between £9.95 - £29.95 are reasonable, but higher than some competitors. Likely to be the best value if you want to save into funds monthly. Read our full review here.
If you will hold funds (paying trail commission) only & your pension fund is above c£50,000
Fidelity FundsNetwork SIPP purchased through Cavendish Online
When bought directly the FundsNetwork SIPP is not especially attractive, there’s a fee of £108 to open the account and a £269 annual fee. But purchase through discount broker Cavendish Online and all trail commission is rebated in exchange for a £10 annual fee and one-off £50 when you open the plan. If you hold more than £50,000 of trail commission paying funds this is likely to be your cheapest option. However, it’s not a cost effective route if you want to hold shares.
If you will predominantly hold non-fund investments, e.g. shares, investment trusts, ETFs
There are no initial or annual SIPP charges, just a flat dealing fee of £9.95 when you buy and sell investments. Unfortunately the dealing fee applies to fund investments too making the e-sipp less attractive for fund-only portfolios, although some partial trail commission rebates may more than compensate. Overall Sippdeal provides excellent value for money. Read our full review here.
If you will hold both funds and shares & don't plan to save regularly
Alliance Trust Savings i.nvest Select SIPP
The key benefits here are annual charge rebates on funds and competitive share dealing charges. The fund rebates, typically between 0.5% - 0.75% a year, could save you a small fortune over time. However, the £12.50 per trade online dealing charge also applies to funds (unlike many competitors). If you invest ad-hoc lump sums, this may not be an issue, but it probably makes small regular savings prohibitive. There's also a reasonable £75 + VAT annual SIPP charge. Read our full review here.
It’s harder to pinpoint ‘best buys’ here because the most cost effective option will hinge on what investments you plan to hold in the SIPP, e.g. commercial property or discretionary management investment services etc. I’d strongly suggest seeking independent advice when considering this type of pension.
How much can I contribute?
You can contribute as much as you want, but will only enjoy tax relief on the greater of £3,600 and your annual earnings, capped at £50,000 - see our pension rules page for more details.
How does tax relief work?
Basic rate tax relief (of 20%) is automatically given on contributions. So pay £80 into your pension and it’ll be made up to £100. Higher rate taxpayers can reclaim the additional higher rate tax (in this example a further £20) via their tax return or by applying directly to HMRC.
Can I move to another pension provider in future?
Yes, but unless moving from a stakeholder pension your existing provider might charge a penalty for doing so.
Can I transfer existing pensions?
Yes, but be careful. It’s seldom a good idea to move out of a final salary occupational pension and you’d need a strong investment case to move out of other pensions if the transfer penalties are significant. Also check you won’t lose out on other benefits such as guaranteed annuity rates or employer contributions/subsidised charges by transferring.
Useful Links & Information
Read more about pensions in our retirement section.
You might find the following Candid Money calculators helpful:
Estimate when you might be able to retire using our Retirement Age Calculator.
Work out how much your pension could be worth in future using our How Much? Pension Calculator.
Check how much pension tax relief is worth using our Pension Tax Relief Calculator.
Compare the impact of costs between different pensions using our Pension Cost Comparison Calculator.