How to... choose your pension plan

Check What You Have Already

If employed, your employer will soon be obliged to offer to make pension contributions on your behalf, if they are not already required to do so.

Introduced last year under “automatic enrolment”, these rules already apply to larger employers and smaller firms will be phased in over the next few years, so consider whether this may be preferable to setting up your own personal pension plan.

Look at the cost

Pension charges typically derive from one of four sources – the pension provider; those running the investment fund; “custodians” of the investments; and intermediaries (such as financial advisers) for arranging and managing the plans.

It is, however, often far from clear how these charges are divided or even what the total is likely to be. A good starting point is to obtain a quotation/illustration of benefits as this should give you some indication of the charges. As with most consumer products, a low price does not always equate to the best deal. Value for money is what matters and sometimes paying more will give you more for every pound spent.

Investing the Contributions

It is crucial to consider how your pension is invested as this will determine what you receive in retirement and the level of risk you will be taking (unless you have the fortune to be in a final-salary scheme). This also needs to be managed on an ongoing basis, rather than just set up and forgotten about until retirement. The law allows pensions to be invested in a wide range of assets, but many plans offer a fairly restricted choice. Therefore, the plan you choose may also be dictated by the type of investments you wish to make.

Level of Contributions

Although retirement may seem many years into the future, try to set a target date and estimate the level of income you will need from your pension (taking inflation into account). That will help you work out the level of contributions that should be made (or what you can reasonably afford). Also remember that pension contributions can represent a very tax-efficient method of saving/investing.

Benefit Options

Pensions are quite flexible in terms of drawing benefits. For example it is possible under current rules to draw the tax-free lump sum from as early as age 55 while deferring the pension income until a later date, which is useful if you want to pay off your mortgage some years prior to giving up work.

• Richard Johnston is a chartered financial planner with Murray Asset Management