The investment platform Interactive Investor will launch in the coming weeks a pension that will be among the best value for savers with small balances. Customers will be able to save up to £50,000 into a self-invested personal pension (Sipp) called Pension Essentials for £5.99 a month.
Until now, Interactive Investor customers who save in a Sipp have been charged £12.99 a month, regardless of how much they have invested. The flat rate was competitive for those with large funds, but one of the most expensive for those with less to invest.
The move is likely to intensify competition among investment platforms seeking to attract millions of savers who are not saving for retirement through workplace plans. The number of employees saving for a pension through their workplace has soared from less than half of those eligible to eight in ten over the last decade, thanks to the introduction of automatic enrollment, a scheme that enrolls most workers into a pension automatically.
However, there are still millions of people who have no retirement savings. Almost a third of people do not expect to receive any provision beyond the state pension when they retire, according to the latest official figures from the Office for National Statistics.
Those who are self-employed are the most likely to have low pension savings as they do not benefit from automatic enrolment. A recent survey of 10,000 people by Interactive Investor found that up to three in four self-employed workers do not contribute to a pension.
Building for the future: almost a third of people do not expect to have any provision beyond the state pension when they retire
However, it cannot be overemphasized that it is rarely too late to start saving for a pension. Even small monthly contributions can make a significant difference in a saver’s lifestyle in retirement.
And Interactive Investor’s new launch is just the latest among pension providers looking to capture this market with competitive rates and easy-to-manage products.
So how do you start collecting a pension if you’ve never done it before? And is Pension Essentials from Interactive Investor a good option or are there already better plans on the market? Research wealth and personal finances.
Should I fund a work or personal pension?
The new full state pension pays £10,600 a year, more than £2,000 less than a single person would need for even a minimum standard of living in retirement, according to the Pension and Lifetime Savings Association. It is therefore imperative to have your own provision to supplement the state pension.
If you are entitled to a workplace pension, this should be your first step. This is because you will enjoy the contribution bonus from your employer. Rejecting a workplace pension means, in practice, saying no to free money.
Employers are required to contribute the equivalent of 3 percent of a worker’s salary to their pension, but some pay much more. An affiliated worker pays 5 percent of his salary.
However, if you don’t have an employer, you can set up your own private pension and still benefit from tax advantages. If you are a basic rate taxpayer, for every 80p you contribute to your pension, the Government will add 20p.
If you are a higher rate taxpayer and pay 60p, the government will add 40p. Therefore, all pensions – whether workplace or private – are generally a lucrative way to save in the long term.
Will you continue to benefit from tax advantages in the future?
You can benefit from pension tax relief up to age 75. Even if you are close to retirement age, you can make a difference to your retirement income by opening a pension now.
For example, if you had no pension at the age of 55 and then started saving £200 a month, when you reached state pension age at 67 you would have enough for an annual income of around £2,000, according to calculations by Standard Life insurer.
However, please note that if you have already accessed a pension, the amount you will be able to pay later and benefit from tax relief will be reduced to £10,000 a year.
What is the best way to start?
Do it! That’s the most important thing to remember. It’s very easy to put it off: wait until you find the ideal pension, or until market conditions are more favorable, or until you have more time.
Of course, you should do your research carefully to make sure you find a pension that works for you, but don’t keep waiting until you find the perfect choice.
Damien Fahy, founder of personal finance website Money To The Masses, says: ‘The most important thing is that there are now a huge number of low-cost pensions available. The sooner you start, the sooner you can benefit from tax relief and compounding power.’
To find the best pension for you, ask yourself a series of questions:
- Do you want to manage your investments yourself or have someone do it for you?
- What type of investments do you want to keep in your pension?
- Do you have existing pensions and want to consolidate them into a new one?
- Will you contribute regularly or invest a lump sum?
- Are you about to retire and would like to have access to your pension savings?
- How much money do you have in your current pension?
Fahy explains: ‘The answers to the above will help you identify the type of pension and provider that suits your needs.
‘For example, if you simply want someone to manage your money for you, a robo-advisory proposition such as Moneyfarm or Nutmeg may be of great interest as they can recommend and manage a portfolio for you.
‘If you have a very large pension fund and want to invest in a wide range of investment options, a Sipp with a fixed fee provider may be more suitable.
“If, on the other hand, you want to invest regularly and pay only small amounts, that will determine which pensions are available, as some have high minimum monthly contribution levels.”
What options should freelancers look at?
If you have a variable income, make sure you take out a pension that allows you to make flexible contributions. That way, you can save more when you can and reduce your savings if your income is lower.
Becky O’Connor, director of pensions firm PensionBee, says: “Some self-employed pensions allow you to contribute to your pension according to your income with no minimum regular contribution amounts.”
If you are self-employed and the director of a limited company, in addition to making personal contributions to a personal pension, your company can contribute.
This can be particularly tax efficient because contributions will benefit from corporation tax relief. Company contributions are not restricted by the size of your salary.
However, O’Connor adds a warning: ‘Revenue and Customs may consider company pension contributions excessive and stop tax relief.
“You should be able to demonstrate why the contributions are considered reasonable and appropriate for your type of role or profession.”
How much will it cost in terms of charges?
Boarding rates vary greatly between providers. Make sure you don’t overpay by shelling out for services and features you don’t need or opting for a service you could find cheaper elsewhere.
The first costs to check are those charged by your platform. However, there are others, such as trading charges if you plan to buy and sell funds and shares, the cost of funds you hold, exit fees if you change providers, and withdrawal fees if you plan to start withdrawing money from your pension. . .
Are there other uses for a personal pension?
Personal pensions can also be useful for consolidating all your existing retirement funds in one place. Conversely, they may also be an option for those who have maximized their employer contributions into a workplace pension and want to save more elsewhere.
Some people contribute to them if they are not working, but can still afford to save for the future.
Is Interactive Investor’s new plan good?
The cost of Pension Essentials compares favorably to Sipp offers from other investment platforms, as the table below shows.
There are no additional fees for monthly investment and trading fees are £3.99 for funds, exchange-traded funds (ETFs), investment trusts and shares listed on the UK and US stock markets.
If customers exceed the £50,000 threshold they will automatically be moved to the £12.99 a month Pension Builder plan, where the fixed rate remains the same regardless of pension size.
There are low-cost alternatives not included in the table below that offer a much more limited range of funds, but which may be cheaper for some savers.
For example, Vanguard charges 0.15 per cent of the value of a Sipp customer’s account holdings up to £250,000, meaning the maximum annual charge is £375.
PensionBee and Nutmeg also offer low-cost pensions with limited funds.
Jeremy Fawcett, founder of financial consultancy Platforum, says of the launch of Pension Essentials: ‘Interactive Investor has always been one of the most expensive options for those starting their investment journey, but one of the most competitive for those further along.
“This product is the first missing step on the investment ladder.”
Holly Mackay, founder of financial website Boring Money, says: ‘Pensions remain a source of great confusion and anxiety for millions of people, and the industry has a lot to do to gain consumer trust.
“Less than half of all pension holders understand what charges they are paying, and providers need to work harder to get this message across.”
He adds: “Having a fixed monthly fee and a low one-off transaction cost makes it much easier for people to understand the charges, removing a key barrier to greater pension adoption by a savings-poor nation.”
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