What kinds of pension can I arrange for myself?

Pensions that you organise yourself are generally called personal pensions.

These can be seen as a special kind of savings account. The advantage is that you get a good tax break but in return your money is tied up until you use it to arrange a pension. Recent changes give you more flexibility about how you turn your savings into income, but it is still a long term investment that you cannot dip into for such things as buying a house or starting a business. You set up a personal pension with an insurance company, bank or other finance company.

The most recent form of personal pension is the stakeholder pension. Stakeholder pensions are low-charge, flexible and portable pensions that allow you to start by contributing as little as £20 a month.

If you are self-employed or work for a company that does not provide an occupational pension then a personal pension is your only option for building up a pension on top of state provision. 

If you work for a company or organisation that does provide an occupational pension, saving through this is almost always a better option as your employer will also contribute to it. You can however make extra savings on top of an occupational pension, and the options for most people include stakeholder and other personal pensions.

Employers can provide a gateway to two types of personal pension – stakeholder pensions and group personal pension schemes, sometimes known as GPPs (everything in the pensions world has to have its own set of initials!).

These are still treated as personal pensions for tax and legal purposes, but usually your employer will deduct your contribution from your pay and give it straight to the pension provider.

Employer-provided stakeholder pensions

If you work for an employer who employs more than five people and does not already have a quality pension scheme then they have to provide access to a stakeholder pension. Employers do not have to contribute to your stakeholder pension, though some do.

You can choose to take out a stakeholder pension with a different pension provider if you wish, but you may only get an employer contribution if you contribute to the one provided by your employer.

You can find out more about stakeholder pensions here on the Pension Service website, or download a pdf about stakeholder pensions from http://www.thepensionservice.gov.uk/resourcecentre/downloads.asp#planning (scroll down to PM8).

Group personal pensions

Group personal pensions (GPPs) are a special kind of personal pension provided through employers. They are best seen as a bundle of individual personal pensions all held together. When you leave your job you can easily unbundle your pension fund from your work colleagues' and you can usually continue to pay into it if you wish.

Their advantages are:

• in many cases your employer will also make a contribution to your fund, and
• they may represent better value than a personal pension you take out yourself as they may have lower charges or provide extra benefits such as life insurance.

Neither of these are guaranteed and you should ask about employer contributions, charges and benefits before joining such a scheme. There is more about group personal pensions in the FSA Guide to pensions – Starting a pension . You can download it or order it from www.fsa.gov.uk/consumer/consumer_publications/index.html or get this pdf version.

how personal pensions provide a pension when you retire

When you want to receive a steady income you can use the funds you have built up to provide a pension. The main way of doing this is by using your pension pot to buy something called an annuity.

This is a financial product provided by pensions and insurance companies. You give them your pension fund, and in return they pay you a pension until you die. There are different kinds of annuities, including those that will provide a pension for surviving dependents after your death.

You will also be able to take some of your pension pot as a lump sum, and from April 2006, if your pension fund is less than £15,000, you can take the whole amount as a lump sum.

In some circumstances you can put off buying an annuity and instead take regular payments from the fund itself. This is known as 'drawdown'. The rules about this were eased in April 2006.

There is a useful guide from the Financial Services Authority on annuities and income drawdown. You can order it from www.fsa.gov.uk/consumer/consumer_publications/index.html or download a pdf version.

The size of a personal pension will depend on:

• how much you (and/or your employer) put in your pension fund and when you put it in as savings left to grow will provide more pension that those put in just before you retire
• how well your pension fund is invested as your pension fund can be invested in different kinds of savings such as stocks and shares or government bonds. You will frequently get a choice about how your savings are invested, and you will probably need advice.
• annuity rates when you retire - the amount of pension you can buy for your pension pot will vary over time as insurance companies change their rates. Different companies will also provide different rates so it is worth shopping around with expert advice.

You can get an idea of how much you might get from the workSMART pensions calculator.

For an overview of personal pensions you can visit this part of the Pensions Service website: 

http://www.thepensionservice.gov.uk/planningahead/personal-pensions.asp