Should I save more into my workplace retirement pot or take out a personal pension? Steve Webb replies
I have moved over from South Africa. I am 56 years old and working, and my company is paying 8 per cent of my salary into a pension for me. I earn £26,000 per year.
I want to take out a pension as I cashed all my South African pension in to buy a property in the UK.
Please advise if taking out a personal pension with Scottish Widows would be good or should I add to my workplace pension?
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Retirement planning: Should I save more into my workplace scheme or take out a personal pension?
Steve Webb replies: It is good that you are still thinking about adding to your pension.
The typical person of your age can expect to live into their mid 80s, and you have a one in four chance of living into your early 90s, so the longer you can carry on building up your pension rather than drawing it down, the better.
Without details of your current workplace pension arrangement it is difficult to do a direct comparison with taking out a personal pension, but there are several reasons why saving more in your workplace pension will often the better option.
I’m assuming that in both cases we are talking about a ‘pot of money’ or defined contribution arrangement.
The first advantage of the workplace pension is the potential for extra contributions from your employer.
What is a defined contribution pension?
Defined contribution pensions take payments from both employer and employee and invest them to provide a pot of money at retirement.
You have said that you get an 8 per cent contribution from your employer which is a good start. But in some cases, employers will go further if their employee wants to contribute more.
So, for example, if you were able to contribute an extra 1 per cent or 2 per cent it is possible that your employer would match this, but only if you did so through the workplace scheme. You should therefore find out if this is an option for you.
The second attraction of your workplace scheme is relatively low charges.
Depending on the size of your employer, it is possible they may have negotiated a good deal on pension charges with their pension provider.
There is already a charge cap on workplace pensions of 0.75 per cent on any money sitting in the ‘default fund’ – this is the place where the money is automatically invested unless you choose otherwise.
But larger firms can often negotiate a better deal than this, so you should find out what charges you are actually paying.
By contrast, an individual who takes out their own personal pension does not have the same buying power and can end up paying more in charges.
Although the differences may seem quite small, over a period of decades they can add up and make a big difference to your final pension pot.
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The third benefit of the workplace pension, and something that is often overlooked, is known as ‘governance’.
This basically means having someone there to oversee how your pension is run and how the money is invested. Most workplace pensions will have some form of governance in place, whether in the form of pension scheme trustees or ‘governance committees’.
These people are there on your behalf to make sure that the pension is well run. There may be much less governance of this sort if you simply go and buy a personal pension off the internet.
In terms of the attraction of a personal pension instead, probably the most obvious one is that this may offer you more choice and flexibility, particularly about how your money is invested.
By contrast, some workplace pensions offer a limited range of choices in terms of investment options. But you may be largely ‘on your own’ if you do this through a personal pension.
So if you choose to invest in something more unusual you would need to appreciate what additional risk you might be taking on and what extra costs might come with that investment.
In short, there’s no single answer to your question that would be right for everyone. But my instinct is that the workplace option comes with a lot of advantages and so it would need to be a particularly attractive personal pension for you to go down that route instead.
Ask Steve Webb a pension question
Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.
He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.
Steve left the Department of Work and Pensions after the May 2015 election. He is now a partner at actuary and consulting firm Lane Clark & Peacock.
If you would like to ask Steve a question about pensions, please email him at [email protected].
Steve will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
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If Steve is unable to answer your question, you can also contact The Pensions Advisory Service, a Government-backed organisation which gives free help to the public. TPAS can be found here and its number is 0800 011 3797.
Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question here. It includes links to Steve’s several earlier columns about state pension forecasts and contracting out, which might be helpful.
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