With two weeks to go before the January 31st deadline for self-employed people or employees without an occupational scheme to purchase a pension and help reduce their income tax bill, the pension companies are again cranking up their sales campaigns to woo new customers.
Despite the hype, you should not let yourself be pressured by the tax deadlines; tax deductions on pension contributions are attractive, but on their own are a poor reason to buy a retirement contract.
Pensions are the longest duration, and after your house, often the most valuable investment a person can make. You need to take sufficient time and care in choosing the right type of policy for your needs and to understand the consequences of, for example, buying a unit-linked managed fund over a with-profit fund. Or choosing to pay on a monthly, rather than annual basis. In the former case, chances are you will be hit by a large wedge of charges, including commission that will have a negative effect on your fund value for several years. If, for whatever reason, you stop paying into the plan, those charges may not be easily recouped.
Paying on a lump-sum, annual, nil allocation unit basis is the option many independent, fee-based advisers recommend to their clients since it keeps costs down and means that the bulk of your contribution goes directly into the investment fund.
Ideally, you should start by seeking out professional advice from a financial adviser with long experience of pension contracts, related tax issues and long-term financial planning.
Make sure this person has access to a wide range of pension plans on the market and can interpret the policy conditions, fund performance data and cost implications so that you understand exactly what is on offer. He or she will help you assess your retirement expectations, your risk and investment profile and the amount of money you can afford to spend.
If you are a self-employed company owner or director, the adviser should also discuss the possibility of a self-administered pension scheme and the pros and cons of a commercial or domestic pension mortgage.
Past fund performance is only one indicator of the potential future success of a pension company fund manager, but it does need to be taken into account when assessing the worth of various personal pension plans. Other factors include the makeup of the fund management team, the company's cost structure and viability and the way it services a long-term customer account.
Above all, the pension adviser should tell you to spread your risk by taking out more than one company's product.
The sooner you start investing in a pension the better. But the nature of work is changing to such a degree that the pension you choose needs to be flexible enough to let you start and stop contributions - without penalty or additional charges - as your employment situation changes.
The National Pensions Initiative, whose report is overdue at this stage, is expected to address other contentious issues, like the lack of portability and transferability of personal pension plans and the compulsary nature of annuity purchases when the policy-holder retires. For these reasons alone you need to make sure you buy into a pension fund which, at the very least, will perform consistently well and ideally exceed the sectoral average more often than not.
The Family Money Personal Pension Survey, prepared by the independent financial planners Financial and Development Management (FDM), and reported on here last Octber, provides actual cash performance figures for 10, 15 and 20-year unit-linked and with-profit pension funds for last year.
The report also provides a considerable amount of background information on the asset allocation of the different funds. Copies are available by calling 045-442051.
