You and your Pension - Investing in the private sector

Use a personal pension to top up your NHS provision, says Paul Kendall.

GPs who want to boost their pension benefits can pay into a private sector personal pension as well as making contributions based on their NHS earnings to the NHS scheme.

As with the NHS scheme, your contributions attract tax relief at your highest rate.

Contributions less management charges go into a provider's pension fund that invests in stocks and shares, property and so on.

When you reach your plan's retirement age, the value that your contributions have by then grown to is used to buy an annuity in order to provide an annual income.

The maximum you can invest in a personal pension is currently restricted to a percentage of earnings but from 6 April that percentage will increase to 100 per cent (less NHS pensioned income).

From the same date, new annual and lifetime caps on total contributions will also apply (GP, 27 January, page 56).

The different types include self-invested personal pensions (SIPPs) - also covered in last week's article- in which you can place investments you already own.

Types of scheme

Stakeholder schemes are low-charge plans that must satisfy minimum government standards to ensure that they offer value for money and flexibility.

While attractive from a cost perspective, choice with stakeholders tends to be restricted to the funds of the provider company. Stakeholder funds do not invest in shares or commercial property.

However, because people without earnings are entitled to invest a maximum of £3,600 before tax relief into a stakeholder scheme each year, you could consider paying into them for children or grandchildren.

Mainstream personal pensions, however, offer you access to a whole range of funds, albeit sometimes at extra cost. The two major categories offered by personal pension providers are with-profits and unit-linked funds.

Contributions to both fund types are invested in shares in the UK and overseas, property and fixed interest securities and cash deposits.

With-profits plans are less risky. At the end of each year, depending on the fund's performance, investors receive a bonus. This is calculated by the fund manager bearing in mind past and future investment returns.

A bonus, once awarded, cannot be taken away.

Bonuses down

Annual bonuses in recent years have tended to be low. In the 1980s bonuses in double figures were often awarded, but more recently they have declined sharply and in some cases have been less than 1 per cent. But there is often a terminal bonus added at the plan's retirement age.

Unit linked plans are riskier as the value of your pension pot will fluctuate in value in line with the underlying investments in the provider's fund.

However, over the longer term, these plans hold out the chance of a higher return, though you are taking a gamble.

Other fund options include tracker funds, where your investment is linked to a selected stock market index such as the FTSE All-Share index.

Tracker funds fluctuate in value but advantages are that investors will not lose out because of a poor investment manager. Charges are lower than those of actively managed funds whose managers choose investments that they expect to perform well and buy and sell the investments according to market conditions.

Managed pension funds cover a wide range of different economic and geographic sectors, for example the US, the Far East and so on.

Some investments will be more risky than others, but you will be given a choice of funds and will be able to switch from fund to fund. Some pension plans are known as 'lifestyle' as in the earlier years, you pay into a higher risk fund.

When you near retirement, you can switch your investment into cash deposits and safer, fixed interest funds. This protects you against a stock market crash just before retiring.

There are also ethical pension funds that avoid investing in companies that are involved with arms dealing, tobacco or states that abuse human rights.

Single lump sums

With personal pensions you can contribute on a monthly basis or just invest a single lump sum. Single lump sums with different providers may protect you from losing out with one provider that underperforms the market.

If the amount you are investing is significant, the commission that your financial adviser receives may also be significant. The size of that commission must be disclosed to you.

It is becoming more common for financial advisers to offer their services for a fee and to use the commission they would have received to enhance the amount of your investment. I recommend you look at this option when investing.

- Chartered accountant Paul Kendall is from medical specialist firm Dodd & Co in Penrith. For details, visit

Pension pointers

- Investing in a personal pension can augment your NHS pension benefits.

You can make regular or lump sum payments and your contributions attract tax relief at your highest rate.

- The percentage of earnings restriction on pensions will be lifted from 6 April. This may enable you to invest more in a personal pension subject to new annual and lifetime limits.

- With-profits personal pensions are less risky than unit-linked ones, which are linked to the fluctuating value of the underlying fund.

- Stakeholder pensions are a low-cost option but offer restricted investment choice.

- Personal pension providers generally offer a wide choice of funds and allow you to switch your investment from fund to fund.

- Plan types include ethical pensions, trackers and schemes where your money is switched into low risk investments close to retirement.

- Use a financial adviser who will charge you a fee so the provider's commission they forego can be added to your investment.

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