It’s (almost) never too late to start building a pension

Investment platform Interactive Investor will launch a pension in the next few weeks that will be among the best values ​​for savers with small balances. Customers will be able to save up to £50,000 in a self-invested personal pension (Sipp) called Pension Essentials for £5.99 a month.

Until now, Interactive Investor customers saving in a Sipp were charged £12.99 a month, regardless of how much they invested. The fixed fee was competitive for those with large pots, but one of the more expensive for those with less investment.

The move is likely to heat up competition among investment platforms seeking to attract millions of savers who are not saving for retirement through workplace schemes. The number of employees saving for a pension through their workplace has jumped from less than half of those eligible to eight in ten over the past decade, thanks to the introduction of auto-enrolment, a scheme that automatically signs most workers up to a pension.

However, there are still millions without retirement savings. Almost a third of people do not expect to have any insurance 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 most likely to have low pension savings as they do not benefit from automatic enrolment. A recent Interactive Investor survey of 10,000 people found that three out of four self-employed workers do not pay into a pension.

However, it should not be stressed too often that it is rarely too late to start saving for retirement. Even small monthly contributions can make a significant difference to a saver’s lifestyle after retirement.

And new startup Interactive Investor is the latest among pension service providers looking to capture this market with competitive fees and easy-to-manage products.

So how do you start a pension if you’ve never done it before? And is Interactive Investor’s Pension Essentials a good option or are there better plans already on the market? Wealth & Personal Finance investigates.

Should you fund an occupational or personal pension?

The new full state pension pays £10,600 a year, more than £2,000 less than a single person needs for even a minimum standard of living in retirement, according to the Pensions and Lifetime Savings Association. So having your own insurance in addition to the state pension is imperative.

If you are entitled to a workplace pension, this should be your first port of call. This is because you will enjoy the contribution bonus from your employer. Turn down a workplace pension and you’re effectively saying no to free money.

Employers are required to pay the equivalent of 3 per cent of a worker’s salary into their pension, but some pay much more. A registered 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 relief. If you’re a basic rate taxpayer, for every 80p you put into your pension, the government will add 20p.

If you’re a higher-rate taxpayer and you 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.

Are you still taking advantage of tax breaks later in life?

You can take advantage of pension tax relief until the age of 75. Even if you are close to retirement age, you can change your post-retirement income by opening a pension now.

For example, if you had no pension at age 55, then started saving £200 a month by the time you reach the state pension age of 67, you’d have enough for an annual income of around £2,000, according to calculations by insurer Standard Life .

Note, however, that if you’ve already received a pension, the amount you can subsequently contribute and benefit from tax relief will drop to £10,000 per year.

What’s the best way to start?

Just do it! This is the most important thing to remember. It’s so easy to procrastinate – waiting to find the perfect pension, or until market conditions are more favorable, or until you have more time.

Of course, you should do your research carefully to ensure you find a pension that works for you, but don’t keep waiting for the perfect choice.

Damien Fahey, founder of personal finance website Money To The Masses, says: “Most importantly, there are now a host of affordable pensions available at low cost. The sooner you start, the sooner you can take advantage of the tax relief and accumulation powers.”

To find the best pension for you, ask yourself a few questions:

• Do you want to manage your investments yourself or have someone do it for you?

• What type of investments do you want to hold in your retirement?

• Do you have existing pensions that you want to consolidate into a new one?

• Will you be contributing regularly or investing a lump sum?

• Are you approaching retirement and would like to be able to withdraw your retirement savings?

• How much money do you have in your current pension?

Fahy explains: “Answering the questions above will help you decide the type of pension and provider to suit your needs.

“For example, if you just want someone to manage your money for you, a robo-advice offering such as Moneyfarm or Nutmeg may be of most 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 you instead want to invest regularly and pay only small amounts, this will dictate which pensions are available, as some have high minimum monthly contribution levels.”

What options should the self-employed consider?

If you have a variable income, be sure to sign up for a pension that will allow you to make flexible contributions. That way, you can save more when you can and cut back if your income is lower.

Becky O’Connor, director at pensions firm PensionBee, says: “Some self-employed pensions allow you to pay into your pension according to your earnings with no minimum regular contribution amounts.”

If you are self-employed and a director of a limited liability company, as well as making personal contributions to a personal pension, your company can participate.

This can be particularly tax efficient as contributions will benefit from corporate tax relief. Company contributions are not limited by the amount of your salary.

However, O’Connor adds a caveat: “Revenue and Customs may consider the company’s pension contributions to be excessive and stop the tax relief.

“You must be able to demonstrate why the contribution is considered reasonable and appropriate for your type of role or occupation.”

What will it cost in terms of fees?

Pension charges vary widely between providers. Make sure you don’t overpay by shelling out money for services and features you don’t need, or by choosing a service you could find cheaper elsewhere.

The first costs you should check are those charged by your platform. However, there are others, such as transaction fees if you plan to buy and sell funds and shares, the cost of the funds you hold, any exit fees if you change provider and withdrawal fees if you plan to start withdrawing money from the pension you are

Are there other uses of the personal pension?

Personal pensions can also be useful for consolidating all your existing pension funds in one place. Conversely, they can also be an option for those who have maxed out their employer contributions to a workplace pension and want to save more elsewhere.

Some people pay into them if they are not working but can still afford to save for the future.

Is Interactive Investor’s New Plan Any Good?

The cost of Pension Essentials compares favorably with Sipp offerings from other investment platforms, as the table below shows.

There are no additional monthly investment fees 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 per month Pension Builder plan, where the flat fee remains the same regardless of the size of the pension.

There are low-cost alternatives not included in the table below that offer a much more limited range of funds, but may prove 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 fee is £375.

PensionBee and Nutmeg also offer cheap pensions with a limited range of funds.

Jeremy Fawcett, founder of financial consultancy Platforum, says of the launch of Pension Essentials: “Interactive Investor has always been one of the more expensive options for those starting their investment journey, but one of the most competitive for those more – onward.

“This product is the missing first rung on the investment ladder.”

Holly Mackay, founder of financial website Boring Money, said: “Pensions remain a source of great confusion and anxiety for millions and the industry has a long way to go to win back consumer confidence.

“Less than half of all pension holders understand what fees they pay and providers need to do more to get that message across.”

She added: “Having a fixed monthly fee and a low unit cost for transactions makes it much easier for people to understand the fees, removing a key barrier to the greater adoption of pensions by an under-saving country.”