Novice Investor - What are the different types of UK Pension Schemes

OK, so pensions, bit of a dirty word really. Lots of press about them losing money for people, companies running off with the money and the stockmarket performing badly. Then there is the fact that they are so flipping complicated, why are there so many different types of UK Pension schemes? What's the difference, and which have I got?

In this hub we aim to provide you with a basic dummies guide to the different types of UK Pension Schemes.

Occupational Vs Personal?

These are two broad distinctions between the various UK pensions. Occupational schemes, include final salary pensions, executive pension plans and SSAS (small self-administered schemes). These beats are quite complicated and also very variable as many have their own individual set of rules.

I will probably write about these in more detail later but, for this post, I am going to put them to one side and focus on Personal Pensions.

Personal Pension

Right, down to business. There are three main types of personal pension schemes in the UK. These are:

• Personal Pension Plan (PPP)
• Stakeholder Pension Plan (SHP)
• Self-invested Personal Pension (SIPP)

One thing you should know straight away is that they are all the same in terms of the key UK tax rules. You can put the same amounts in to them, invest the money and take the same levels of income. You can also generally transfer money from one type to another (although you should seek advice to check individual policy terms etc).

So what's the fuss about? The key differences for each are:

Stakeholder Pension

These are the newest edition and were dreamt up by the UK Labour Government. They are a simplified version of the other UK Pension Schemes and are likely to be quite restricted in the range of investment funds you can invest within them. You are likely to see lots of tracker funds or insurance company managed funds in these policies.

They are flexible and you can start and stop contributions whenever you like (this applies to all three types though).

They are cheaper, the Government introduced a price cap, originally 1% but now 1.5% for a certain period of time. There is generally no initial fee and initial investment amounts can be small.

Any qualifying UK resident (and a few others) can invest £3,600 per tax year in to a stakeholder pension and still get basic rate tax relief. This means you actually contribute £2,880 and the Government tops it up to the full amount of £3,600. Higher rate tax relief is available too if that is relevant to you.

SHP have been quite popular with those on low incomes (and who want a cheap and cheerful product) and the wealthy who have set them up for spouses, children and grandchildren.

A lot of people think, however, that you need to use a stakeholder pension for a child or grandchild's £3,600 annual investment. This is not the case, any of the three personal pension types could be used.

Personal Pension Plans

These are the big brothers of stakeholder pension and the second type uk Personal Pension Schemes. They operate in much the same way but provide a much wider choice of investment funds for holders to invest in to. They also tend to be more expensive, with higher annual charges and sometimes initial charges applied to contributions.

Personal Pension Plans may also have higher minimum investments to get them set up.

SIPPs

Next up is the big daddy, the ultimate pension scheme for life.  A SIPP is an independent pension scheme wrapper with almost complete flexibility. They operate in the same rules as the others but are  generally the only that will enable you to pick and manage your own individual stocks and shares.

Some of the things you can readily invest in via a SIPP include property (needs to be commercial or other qualifying, i.e. not residential), private equity, private company shares, structured products and hedge funds. You can appoint an investment manager of your choice (so long as the SIPP provider agrees) to manage the fund for you.

The other big difference is when it comes to take benefit, a SIPP permits something called Income Drawdown, or Unsecured Pension.  This is an alternative to buying an annuity when you come to retire.  Taking your pension is a whole different area and I will probably write another Hub on this topic at some point so keep a look out for that.

One thing to keep in mind for a SIPP is that, although you can theoretically use it to invest in anything that the UK Government rules allow, this is not always the case the the SIPP provider will also apply their own rules and requirements which may rule out certain things.

I hope this is a useful overview of the main UK Pension Schemes, it is intended only as a summary and not as advice or a review of suitability.  Pensions and retirement are important, please take advice.