Setting Up a Pension

This post is the second in our Pensions Essentials series. Here we will look at setting up a pension, and how this might happen through your employer. We will also cover pension transfers and what to expect if you decide to bring some of your pensions together

Joining your workplace pension

As an employee, the best way to start saving in to a pension is to join your workplace scheme. If you are 22 years and over and you earn more than £10,000 a year, you are eligible to be automatically enrolled in your workplace pension. If you are 16 and older, you can ask to join the scheme and your employer cannot say no.

Joining your workplace pension means that your employer will contribute at least 3% of your salary. In most cases you will contribute 5% as a minimum of your gross pay. In real terms, this equals 4% of your salary. The additional 1% made up of tax relief or government top up. Your contribution is taken directly from your pay either before or after tax, depending on the arrangement agreed.

Your employer will automatically set up your pension. You may be able to increase your contribution level if you wish. Most providers have an online portal where you can view your account, select levels of contributions and transfer in older pensions. You may even be able to change investment profiles. Please consult the information pack provided by your employer.

Setting up a personal pension

You may consider setting up a personal pension if you want an additional retirement pot. Personal pensions are also helpful for those who are self employed and don’t qualify for auto-enrollment.

The first step here is to decide what product is right for you. You can shop around yourself or go through a regulated financial adviser. They will recommend products based on your personal circumstances. If you are looking for yourself, bear in mind that many pension providers offer incentives such as cash and/or free shares. This is absolutely fine but you need to make sure you check the features of each product carefully – mainly the fees charged, available investments and anything else that you feel is relevant to you. Try not to make your decision solely based on the incentives.

You can usually apply online for a pension and the account can be set up straight away. You will likely need to answer some questions that will make sure that you are eligible to receive tax relief. An illustration will be given to you which will let you know how much you might receive as income when you retire. This will be based on what you intend to contribute and/or tranfer in and will take into account inflation, fees and growth rates so you can have an idea of what to expect as an income.

Once you account is open you will be able to make your first contribution and select a default investment fund or range of funds. You should also be able to choose to make regular contributions to your pension fund and apply to have one or more or your existing pensions transferred across.

Transferring your existing pensions

If you have any pensions elsewhere, maybe from old jobs or just another personal pension you don’t engage with; you can arrange with your new provider to have them transferred across.

If you are looking to move an existing (or any) workplace pension to a new personal pension, please take your time to understand what you may be losing if you transfer. Certain benefits and guarantees cannot be kept if a fund transfers. You may also lose out on valuable employer contributions so do make sure that you understand all of this first.

Transferring a pension is a relatively straight forward thing to do. You apply to your new provider, give them as much information about the transfer as possible (account number, scheme provider, etc.) and they will do the rest for you. Most transfers are in cash but you may be able to transfer your investments if your new provider allows this. Many pension schemes now use an electronic transfer service. This will speed up most of the process.

If there are any delay, it will usually be because the scheme need some more information. There is a process many workplace pensions have to follow, especially if you are transferring to a personal pension. You may even have to speak to someone at MoneyHelper. This can be frustrating but is a necessary evil someimes. The onus is often on the transferring pension to make sure the transfer is legitimate. As long as there are no unnecessary delays your transfer should complete within a month but it can take longer.

So what if you change your mind

If you decide that the new pension scheme is not right for you, you have 30 days to cancel. You welcome pack should contain information on how you can cancel your pension and any transfers that you have started.

If you cancel, net contributions will be returned to you (minus any tax relief which is returned to HMRC) and transfers are unwounded and returned too. You may not benefit from any growth and if there are market losses, you may not get back exactly what you put in. It is worth checking your scheme Terms and Conditions about how they deal with this.

Separately, you have 30 days to cancel any transfers you make to a pension scheme, not just those you make when the pension is opened. Bear in mind that the old scheme may not accept the transfer back so you may need to make other arrangements if you do not want to keep the new account.

Summary

If you can, look at joining your employer pension scheme as soon as possible. You will benefit from, minimum 3% contributions.
Your employer will set up your workplace pension for you.
Make sure you shop around or speak to a financial adviser before setting up a personal pension.
Opening a personal pension is relatively straight forward and most providers operate online applications. Once opened, you can contribute straight away and set up a request to transfer any existing pensions you have.
Your pension provider will managed the transfer process. They will contact the old pension provider and complete the process through them.
You can cancel your new pension account within 30 days. You can also cancel new transfer requests within 30 days.