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How to Start a Pension

How to start a pension UK

My step-by-step guide on how to start a pension will help you make the best decisions for your current circumstances so you can effectively plan for a comfortable retirement.

  • Find out how to start a pension
  • Learn about different pensions
  • Find the right pension for you

How to start a pension in 5 easy steps

  1. Choose what type of pension to start – Workplace, personal or self-invested pension
  2. Select the best pension provider – Choose from a range of the best UK pension providers
  3. Consolidate any existing pensions – If you have more than one pension, consider consolidating them into one
  4. Decide how much to save into your pension – Use a pension calculator and budget planner to workout how much you can afford
  5. Choose what to invest your pension savings in – Understand that your pension contributions are invested in the stock market

1. Choose what sort of pension to start

There are three main pension types to choose from:

  • A workplace pension scheme
  • A personal pension
  • A self-invested personal pension (SIPP)

Read more about each type of UK pension below.

Workplace pensions

This is the holy grail of pensions. If you are employed then you should be automatically enrolled into your employer’s workplace pension scheme. If this is an option for you, then look no further.

Pros of Workplace Pensions

  • Tax relief on contributions to your pension
  • Ability to withdraw a 25% tax-free lump sum when you retire
  • Effective inheritance tax (IHT) planning (speak to your financial adviser)
  • Investments that are allowed to grow within a tax-efficient fund
  • Additional contributions from your employer of at least 3% of your salary

Eligibility Criteria

  • You must be in employment
  • You must be over 22 years of age
  • You must earn over £10,000 a year

Personal Pensions

Also known as a private pension, this is a good option if you would like to start your own pension but lack the experience to manage your own investment funds.

Pros of Private Pensions

  • Tax relief on contributions to your pension
  • Ability to withdraw a 25% tax-free lump sum when you retire
  • Effective inheritance tax (IHT) planning (speak to your financial adviser)
  • Investments that are allowed to grow within a tax-efficient fund
  • Complete flexibility on pension contributions
  • Flexibility on investments

Self-Invested Personal Pension (SIPP)

This provides maximum control over contributions and investments. A SIPP is basically a personal pension that offers more investment options.

Pros of Self-Invested Personal Pensions (SIPPs)

  • Tax relief on contributions to your pension
  • Ability to withdraw a 25% tax-free lump sum when you retire
  • Low-cost option
  • Easy to consolidate existing pensions into one fund
  • You can choose your own investments
  • Complete flexibility on contributions

Read more: The most important pros and cons of investing in SIPPs

2. Select the best pension provider

If you are starting a workplace pension then your HR department should automatically enrol you into their pension scheme. For personal pensions and SIPPs, there are several pension providers to choose from.

You will need to consider your level of investment experience when selecting the best provider for you.

The following is not an exhaustive list but covers a few of my suggestions.

Best pensions for experienced investors

Provider Account Fee Buying and selling shares FX rate Transfer out fee Trustpilot Score 
Freetrade SIPP £9.99 pcm FREE Spot rate +0.45% FREE 4.1/5
Interactive Investor SIPP £19.99 pcm £7.99 1 free trade pcm Spot rate + 1.5% FREE 4.7/5
AJ Bell SIPP 0.25% £9.95 Spot rate + 1% £9.95 4.6/5

Best ready-made pension funds

Provider Platform Fee Fund Cost Transfer Out Trustpilot Score
PensionBee SIPP 0.5% – 0.95% 0.03% transaction cost FREE 4.6/5
Penfold SIPP 0.75% FREE FREE 4.6/5
Moneybox SIPP 0.45% 0.13% – 0.25% fund provider cost FREE 4.6/5

All these providers are authorised and regulated by the Financial Conduct Authority.

3. Consolidate any existing pensions

If you have worked in several different jobs then the probability is that you have multiple workplace pension schemes. Combining and transferring all your pensions, or consolidating them, makes them easier to manage and can help reduce your costs.

Consolidating your pensions can be done quickly and easily using the following steps:

  1. Find all your old pensions. You can do this by getting in touch with previous employers or using the free government Pension Tracing Service.
  2. Contact your new provider and provide them with the details of your old pensions and request a consolidation service

4. Decide how much to save into your pension

Whilst there is no magic number that covers all circumstances, there are some useful guides that you can use to help you save enough money for your retirement.

Many providers have a Pension Calculator like Hargreaves Lansdown, which you can access for free. This will give you an indication of how much you will have saved into your pension plan when you retire.

Of course, the pension calculator will not take into account your current circumstances. Therefore, many experts will recommend the following rule of thumb; simply halve your current age and use that number as the percentage of your salary you should aim to save each month.

Of course, you will need to take into account your retirement goals. A financial advisor can help identify what you should start saving in order to achieve your goals.

5. Choose what to invest your pension pot in

If you are starting a workplace pension, then your pension investments will be chosen for you. However, for personal pensions and SIPPs, you will have more control over how your pension fund is invested.

Your private pension provider should offer assistance when it comes to investment choices. In order to establish your risk level, you will often be required to complete a short questionnaire.

Some of the stock market assets that you can hold in personal pension plans include:

  • Shares
  • Funds
  • Property
  • Bonds
  • Cash

If you have limited investment experience, then it would advisable to select a managed fund that invests in a diverse mix of assets in order to manage your risk.

UK Pension Need-to-Knows

  • State pension age is 66 and a personal pension can not be accessed before the age of 55.
  • A basic rate taxpayer will enjoy a 20% tax relief on any pension contributions you or your employer make to your personal psion plan or workplace scheme.
  • Additional rate taxpayers get 45% tax relief added to their pension money.
  • You can receive tax relief on 100% of your income but not on any contributions made over this amount.
  • The annual limit is currently £40,000. However, any unused allowance from the previous 3 years can be rolled over.
  • There is also a lifetime limit of £1,078,900.

Frequently asked questions about UK pensions

What are defined contribution schemes?

Defined contribution schemes are workplace or private pensions where you build up a pot of money that provides an income in your retirement. Your income will depend on the amount you have paid in and saved, unlike defined benefit schemes which provide a guaranteed income.

What is the best pension for self-employed people?

Private pensions or SIPPs will usually be the best pension option for self-employed people. Penfold provides pension savers with a consolidation service that includes locating lost pensions, plans that are tailored to your individual circumstances, and an easy-to-set-up process.

What are stakeholder pensions?

Stakeholder pensions are a type of personal pension that requires low or flexible contributions, default investment strategies, and capped charges.

What Will I Get From the State Pension?

You will get up to £176.60 a week* when you reach retirement age, which is why it’s so important that you also save into a workplace or personal pension. (*Correct at time of publishing)

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