Pension Academy video series

Episode 2: How do you set up a pension?

Key takeaways

You'll need to choose a pension provider, which are companies that invest your money for you and tell you how your pension's performing.

Each provider will offer a range of different pension plans, so you can choose between different investment strategies and risk levels.

They'll also charge different fees for investing your money in a pension plan for you.

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Setting up a pension can be really easy. In fact, it can be so easy that you might not need to do anything at all. That’s because, if you work at a company, are over 22 and earn over £10,000, you’ll be automatically enrolled into their workplace pension scheme when you join. You can opt-out, if you want. But you’ll lose out on free money your company would have paid into your pension, which could see you retire with a smaller pension income. So if you want to maximise your retirement income, staying enrolled in your company pension is a no-brainer! And if you don’t work for a company - maybe you work for yourself, or you’re not able to work - you can set up your own personal pension directly with a pension provider. And these days, that can be pretty simple, too.

OK, let’s get into a bit more detail about how setting up a pension works...

The first thing you’ll need to do is choose a pension provider. Providers are companies that invest your money for you and tell you how your pension’s performing. There are lots of them to choose from, but the ones you might recognise include Aviva, Legal & General and Scottish Widows. You’ll need to check the range of pension plans they offer, as well as the fees they charge. But, if you’re automatically enrolled into your company’s pension, the provider will be chosen for you. So you only need to do this step if you’d like to set up your own pension - if, for example, you’re self-employed, not currently working, or want to combine your old pensions into one so you have more control over how your savings are invested.

Once your provider’s sorted, you’ll need to choose a pension plan - and every pension provider will have their own range of plans, a bit like how banks offer a range of different savings accounts. Each plan has its own investment strategy and charges different fees, so you’ll need to figure out which plan’s right for you.

First, you’ll want to think about risk vs reward. Each pension plan will come with a risk rating from low to high.
  • Higher-risk plans have the most potential to grow your money. They’ll invest most of your money into the stock market, which has a track record of growing more than other types of investments. But, because the stock market can be unpredictable and even crash, higher-risk plans are more likely to suffer if individual companies or markets perform poorly. Higher-risk plans are an option for people who are still a long way from retirement, since any short-term losses are usually made up for over the long-term.
  • Lower-risk plans invest in things that are less likely to lose value when the economy’s going through a rough patch. So they might invest in government bonds, which don’t grow your money very much but also aren’t as affected by what’s going on in the stock market. You might consider lower-risk plans if you’re older and looking for stability as you approach retirement.
  • Medium-risk plans are just as they sound. They balance your investments so your money has some growth potential while retaining some stability. They can be suitable for people who are more cautious with their money, or are 5-10 years from retirement.
Now, if you’re like me and like the idea of experts managing the risk for you, there’s another type of pension plan you could consider. And it’s offered by a few pension providers. It’s called a target date fund, and it’s a type of pension plan that automatically changes the mix of investments by focusing on growth while you’re younger, and stability as you get older and approach retirement. PensionBee’s own Tailored Plan is a target date fund, and it’s the most popular plan chosen by their customers.

Okay, so we know that pension plans carry different levels of risk. But what else do pension plans offer that we might want to consider?

If you’re concerned about the future of our planet, like I am, you might want to consider a socially responsible pension. These are pension plans that only invest your money into companies that consider their impact on the environment and society - because, unfortunately, there are still plenty of companies whose activities contribute to climate change and social injustice. So socially responsible pensions could benefit your pocket as well as the planet.

Right, I know this is a lot to take in. But stay with me, because we’re nearly there for this section. You’re doing great!

Let’s briefly talk about fees. Every pension provider charges a fee to manage your pension. And the fee will vary depending on the pension plan you choose. Unfortunately, there’s no standard fee structure, so it can be hard to compare different pension plans. Some providers, like PensionBee, will charge just one annual management fee. So you’ll know exactly where you stand and there are no hidden surprises. But other providers? It’s a mixed bag. Some will charge a number of fees, including the annual management fee, fund fee, platform fee, adviser fee... and not all providers explain this as clearly as they should. So you need to always read the small print. In general, you can expect to pay somewhere between 0.5 and 1.5 percent of your pension balance annually in fees. So if your pension’s worth £10,000, you might pay £100 a year.

Finally, did you know that if you already have a pension from an old job, you can combine it into a new pension plan. And if you use a provider like PensionBee, the process isn’t much different to switching bank accounts. You can simply tell your new provider that you want to transfer your old pension to them, share some basic details, and they’ll do the rest for you. You don’t even need to speak with your old provider. And there are some really good benefits of doing this. For example, with all your pension savings in one place, you’ll find it much easier to check your balance and performance. And you’ll ultimately be in more control of your money and have greater visibility of what you’re paying in fees. Now, some people think that having lots of separate pensions is better than combining them because it spreads the risk. But that’s a myth! Most modern pension plans have a diversified mix of investments already. And you can choose one that follows an investment strategy that’s suitable for your current needs.

Alright, let’s quickly recap how to set up a pension:
  • Make sure you’re enrolled in your company’s pension scheme so they pay into your pension too. And if you’re self-employed or unable to work, choose a pension provider yourself.
  • Pick a pension plan. Consider what level of risk you want, what fees it charges, and whether you want to invest your money in line with your values via a socially responsible plan.
  • Consider consolidating your old pensions into your new plan, so you can manage everything in one place.
This video was presented by Patricia Bright on behalf of PensionBee. Patricia Bright isn't a financial adviser and the views and opinions expressed in this informative video are those of Patricia alone and do not constitute financial advice.

The content of this video has been reviewed by the pension experts at PensionBee and was confirmed to be correct and in line with current HMRC guidelines and legislation based on their understanding of current tax legislation as of 4 August 2023.

Remember, as with all investments, your capital is at risk.

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