The man who had six pensions...

The pensions landscape is littered with forgotten tax breaks, misguided schemes and failed initiatives. Even the 25% tax free cashback rule  is the result of some long-forgotten compromise dating back to the 1930s. And over it all hover the birds of prey of the finance industry, looking for easy pickings. But all of us have to find a way through somehow - so what is the best path to choose?

Here's the vanilla guide to the key features.

Broadly there are three places to go to get a pension. And each offers two choices. That's six different pensions....

The big three pensions organisers you can look to are

• the government
• your employer or
• you can do it yourself.
  

The government provides the basic state pension, and also offers an additional state pension [ASP] that used to be called SERPS [state earnings related pension] and then became the Second State Pension. Savers could skip the ASP by contracting out. Recently the UK governments focus has changed to making sure we all contract in for an additional basic minimum. Their solution is the personal pension accounts from 2012, but these really belong in the 'employers' section.

Employers provide two kinds of pension schemes. The old style 'defined benefit' promised a pension based on number of years worked. Your pension savings didn't bounce around with the stock market. As long as your employer didn't go bust your pension was secure. Very nice to have but also expensive [for the employer], which is why 'defined contribution' schemes are taking over. Here your pension depends on how much money is in the pot when you retire. And that depends on how your savings have done. These are also known as money purchase schemes. Employers usually pay towards the admin costs of these schemes, and may add in their own contribution. Think of it as free money. 

Finally you can organise your own pension two ways too: by paying into a personal pension plan [ie from an insurance company] or by doing the whole thing yourself [a self-invested pension plan, SIPP].

So which is best?  Whatever's cheapest, most secure, and index-linked.

In first place:

Anything from the government is about as good as it gets [unless you are CEO of a failed bank]. The state pension is due to be indexed in line with earnings [not just inflation linked]. And if you work for the government, so much the better. [Better still for women]

In second place

Almost any 'defined benefit' scheme - because the good ones will have insulated savers from the roller coaster ride of 21st century equity markets. [Also good for women]

In third place

Anything with free money - eg where the employer makes a contribution. Or you can get national insurance rebates ['salary sacrifice'].

And languishing outside the medals is the whole of the personal pensions industry. It has to, almost by definition. It feels the full lash of market forces with no protective buffer [unlike defined benefit schemes, or those with employer contributions.]  But even here there is a winner.

In fourth place:

The SIPP - self invested pension.

Which puts the personal pension plan - the raison d'etre of much of the finance industry - firmly in last place.  Why? Because it charges the most with no discernible uplift in performance.

So what am I supposed to do?

Hold back on the traditional personal pension plan until you have checked out the other options

Which are?

Buying additional years if you can; seeing if employer will match any of your contributions; exploring salary sacrifice [national insurance rebates]; seeing if  your employer's additional voluntary contributions [AVCs] have low charges; start your own SIPP...

SIPPS are expensive

Yes they can be - but for the very simplest SIPPs set up costs and annual running costs can be under £50, or even zero. Google cheap SIPP. I got Hargreaves Lansdown, SIPPDEAL and Alliance Trust. But if you don't want to pay the  1.5% charges of managed funds [and vanilla investors don't] then be wary of HL -  they will hit you for 0.5% anyway [capped at £200] on other investments. Either way they are looking to get their 0.5%.

Does the odd 0.5% make such a difference?

Every year. Until you retire? Yes. You should aim to get all your expenses under 0.5%, under 0.3% you are doing well, under 0.1% and you are probably in a US government scheme. UK fund expenses usually start around 1.5% and in practice [by the time you buy, and then sell] will have exceeded 2% per year.

What about stakeholder schemes?

Capped at 1.5% expenses for the first ten years? Poor value. The government wanted to make the charges a flat 1% - and failed. That tells you something about the importance of the odd 0.5%.

Are women really better off in defined benefits schemes?

If you buy a pension for cash it cost about 10% more if you are a woman.

My friend's been a teacher all her life. She's retiring at 60.

If she is in the state system she will be ok

But she says she is only get £20 000 pa pension

That would cost £600 000 to buy. How may people save that much in their lifetime? Tell her to cheer up.

Is it true women get their state pensions early?

Up until 2020, yes. Are you a woman?

No

Would you like to be?

?

If you have a sex change and get a Gender Recognition Certificate you can claim your pension early.

I'd rather have a small pension and a ...

Just checking