Why I’m Looking into Starting Another Pension

Written by Karen Bryan

£1 coin symbolI really thought that after buying an annuity following my 55th birthday in Spring 2014, I was done with personal pensions.

However, the new freedoms to access your pension pot, due to start on 6 April 2015, have got me thinking about starting a new pension.

I need to pay another four years National Insurance Contributions (NICs) from April 2015 in order to make up the 35 years required to be eligible for a full State Pension. If I work and pay National Insurance for the next four years, that takes me to the age of 60. There is an option to pay voluntary NICs to make up missing years, but they cost a lot more than Class 2 NICs for the self-employed.

Assuming I work until I’m 60 and have then paid enough to receive a full State Pension, I’d still have six years to wait before I’ll receive my State Pension. If by the age of 60, I want to stop work and have built up a small pension pot over the next four years, I could use that pension pot to top-up my annuity income for that six-year gap.

As my annuity is quite small, I could have an additional income of a few thousand a year from the pension pot without having to pay any income tax on it. Also, if I don’t take the 25% tax-free lump sum from the new pension pot, then 25% of any withdrawals will be tax-free.

As ever, part of the attraction of starting another pension is the tax relief on contributions, which could allow me to make a quick profit on my personal pension. However, I need to weigh that up against all the charges and fees of a personal pension.

There’s usually an Annual Management Charge (AMC) on pension pots, which can seriously erode the value of your pension pot. But as I’d plan to hold that pension pot for ten years, until I reach State Pension age at 66, the charges wouldn’t have too much time to rack up.

My main concern is where to put a new pension pot. A stock market based pension fund has potential for growth (and loss). A lot of cash based pension funds earn a pitiful rate of interest, which in our experience, doesn’t even cover the AMC. Again, I’m wishing that there was an index linked pension fund, which would maintain the spending power of my pension pot.

At present, many income drawdown pension schemes have pretty hefty fees to set up income drawdown and for each withdrawal made. I’d plan to make one withdrawal per year, so that’d help keep these charges to a minimum.

Maybe it’d be more straightforward to forget about a new pension and stick to putting any extra money into a Cash ISA, which won’t have any set-up, management or withdrawal charges, plus will allow tax-free withdrawals, and forget about the tax relief on pension contributions.

I don’t feel that I can make the decision on whether to re-start saving into a pension pot until I have more information about possible new pension products with a low AMCs which offer cheap, flexible access to your pension pot.