Pensions: what's the benefit?Posted by Andrew Stallard
Andrew Stallard looks at changes being made to pension funds and the quality and choice of funds available to you.
Following on from last week's pensions article, we'll look in more detail here about how you can find the best pension scheme for you and for your employees, following the changes to workplace pensions.
All company pension schemes will need to be compliant with new Government Workplace pension law, but that notwithstanding, it's really important to consider what features are desirable for your employees and your business.
The best tip we can give you when it comes to setting up a workplace pension scheme is to look at it as part of a bigger picture. Pensions don't have to be set up in isolation; why not bring them in as part of a wider employee benefits scheme. Employee benefits can include income protection, health insurance, travel insurance, dental plans, cash plans, childcare vouchers, employee assistance programs and health screening.
As with many business decisions the use of professionals can help save a large amount of time and money, and our advice would be to use a fee-based independent financial adviser who will help you select the right combination of benefits for your scheme.
An ideal scheme should allow a good range of funds to suit the different times to retirement and different attitudes to risk that scheme members will have. Schemes should also have a default fund that members' payments will be made to if they don't want to select their own funds. Access to ethical funds and cash funds (with no investment risk) can also be an attractive feature.
If the pension scheme is not going to be actively managed by an adviser, then so called 'life styling' funds can have an advantage. This type of fund will gradually move money into less volatile investments (typically out of shares and into government bonds) as the retirement date of the member approaches.
Fund performance and charges on a pension over the life time of the member can dramatically impact the final size of a pension. Charges can generally be put into two categories: firstly, the charges made by the pension provider for the funds it offers and secondly, the charges made by the adviser.
As with so many things, shopping around is advisable to get the best value. Stakeholder pension schemes usually offer the lowest price schemes and are only allowed to charge a fixed maximum percentage; however, the usual drawback is a restricted choice of funds. Help yourself to find the best deal by using an independent financial adviser who will do the research and may be able to negotiate favourable rates from insurance companies that act as money purchase pension providers.
When offering a price for their products, insurance companies will consider the size of the scheme in terms of number of members, total monthly contributions and possible transfers in from existing schemes. Because small companies will not be investing as much as larger companies, it can be more difficult to obtain favourable terms. All good financial advisers will balance up the charges being made by the pension funds, the quality of those funds and the degree of choice in funds available to find the one most suitable for you.
What about costs? Historically the cost of adviser advice was not always clear, with, in many cases, commission being taken from company schemes by the pension providers to pay the adviser. From January 2013, the FSA will ban commission payments on financial products sold in this way following the Retail Distribution Review (RDR) although existing schemes may continue. A pension review may help to identify how charges are being made by your adviser and whether this is appropriate in the future.
Finally, once you've selected a scheme, it's vital that all the details are properly communicated to all employees. Again, you don't have to do this on your own - part of your adviser's job in setting up a new scheme will be explaining the importance of pension saving and the options available within the scheme to employees.
The value of shares and investments can go down as well as up.
Past performance is not a guide to future performance.
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