Personal pensions: a guide

If you don't have access to a work pension or want to boost your retirement savings, a personal pension or Sipp is worth considering.

If you are self-employed, or don't work, a personal pension is a sensible way to save for retirement. It can also be a practical option if you have a handful of previous work pensions that you'd like to combine into one, easier to manage pot, or you want to top up your employer's scheme.

Nathan Long, senior analyst at Hargreaves Lansdown says: "Workplace pensions are often still quite restrictive, with employers and trustees seeing no need to offer their employees any significant level of choice or control over their retirement savings. So some people use a Sipp as a top up or parallel scheme in addition to their current employer's pensions so they can get the most out of their retirement saving. They can also be used as a consolidation scheme into which people transfer their old pensions as they move from one job to another."

• Learn more: What is a SIPP? | Are SIPPs worth it? | Open a SIPP

Although you don't get the benefit of employer contributions into a standalone pension, you still get tax relief based on the level of income tax you pay. This essentially means it costs a basic rate taxpayer 80p to save £1, while higher rate taxpayers pay just 60p and additional rate taxpayers just 55p.

Your pension provider can claim basic rate tax relief on your behalf, but to claim any further tax relief you are entitled to you will have to contact HMRC and may have to complete a tax return.

Pension rules explained

Choosing a personal pension

You can open a personal pension with a traditional insurance company like Aviva, Royal London or Standard Life. Costs have fallen greatly on modern personal pensions - eradicating the need for so-called stakeholder pensions launched in the early 2000s to reduce the cost of retirement saving - and many offer a very wide range of investment options from which you can choose. They can be easily managed online but some options may only be available from independent financial advisers.

Moneywise pension awards 2019

Alternatively you may want to choose a self-invested personal pension (known as a Sipp) from an online platform such as AJ Bell, interactive investor (Moneywise's parent company) or Hargreaves Lansdown. An added advantage of this option is that you can hold your pension alongside other savings pots such as a stocks and shares Isa or individual share holdings.

Is a Sipp my best investment option?

Sipps used to be very expensive pensions saving for sophisticated and wealthy investors, but the rise of online investing has bought costs down so much and simplified offerings with increased support for novice investors means they are now considered a mainstream and mass market option.

A Sipp, whether it is offered by an insurance company or online platform, should offer access to thousands of investment funds but may also offer options including investment trusts, exchange traded funds (ETFs) and shares.

For savers that find so much choice daunting, platforms also offer ready-made portfolios and expert-recommended lists to help you make your choice. 

With a large degree of overlap between the investment options available from different platforms, your decision will ultimately be led by a combination of charges, customer service and how easy you find  the platform to use.

Platforms will charge an administration fee for their service. Interactive Investor has a fixed monthly fee but most providers charge a percentage-based fee. You may also need to pay a fee to trade funds or buy shares and income drawdown charges may apply when you start taking an income from your pot when you retire.

Which works out to be most cost-effective for you will depend on how much money you have invested and how frequently you plan to trade.

Myron Jobson, personal finance campaign manager at interactive investor says: "The main two elements to factor in when choosing a Sipp is cost and the quality of the service. With a long-term investment like a pension, charges can eat into your returns and could significantly reduce the cash to go towards your retirement income. For those with large pot sizes, the flat fee structure can be very cost effective, whereas for those with smaller pots, and those just starting out, a percentage fee may be more cost-effective, in the near term at least.";

"Judging the quality is a matter of personal choice. Some investors value an expansive investment universe to choose from, model portfolios and investment ideas, while others will be satisfied with a simple service - as long as costs are low. Others may want all those things as well as cost efficiency so homework is key."

Choose the right Sipp platform for you with our guide to charges.

You can start a personal pension or Sipp from as little as £50 or £100 a month - however the more you manage to put away, the better off you'll be when you retire. Alternatively you can start one by consolidating existing pensions that you may have.