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Fresh thinking

Between 1988 and 1995, I contributed to a personal pension plan. I paid in both a regular monthly amount and a series of lump-sum payments. I am now able to recommence making contributions but I am unsure as to whether I should restart my plan or start a new plan. Which should I do?

Personal pension plans have changed enormously since you first started paying into your plan in 1988. Not only has there been a lot of consolidation of product providers during the past years but the investment world has changed as well.

You may or may not be able to recommence making payments to your existing plan and will need to check that out. Your plan may no longer be competitive in terms of the charges that apply to it. You will need to consider if it is more cost-effective to recommence payments or start a new plan. You will also need to consider whether you should leave your existing pension fund with your current provider or transfer it to a new plan provider.

In the late 1980s, when personal pension plans were first introduced, plan charges were many and varied. Often, a plan would have a buying and selling spread on units purchased, typically 5 per cent, a monthly policy fee, typically £2.50, an annual management charge on the fund of, say, 0.75-1 per cent and usually some form of initial charge.

The initial charge usually took the form of a capital unit charge (a higher annual management charge) on units purchased in the first one or two years and on investment units purchased by increased contributions. To balance these charges, some providers offered allocation rates in excess of 100 per cent of the contribution paid.

In addition to these initial and ongoing charges, many plans also had additional charges for the planholder who wished to retire early or transfer to a new plan provider.

The good news is that personal pension plans, on the whole, have lower and fewer charges today. The typical quality personal pension plan has only an annual management charge. This is usually in the order of 1 per cent per year or less. In addition, modern plans tend not to have exit penalties on early retirement or transfer.

If you intend to make future contributions, it is highly likely that you will pay lower charges to the plan provider if you take out a new-style plan.

What you do with the existing pension fund you have built up is slightly more complex. You really have two choices – leave it where it is or transfer to another plan provider. You will need to check if the future plan charges of your current provider are more or less than the future plan charges of a new provider. This can be done by obtaining illustrations from your current provider of the estimated value of your plan at retirement and at an early retirement age, say, 60 or 55. They will also quote a transfer value so that you can see if the new provider will charge less. All providers use the same fund growth rate for illustrations but their own plan charges.

Future charges are an important item to consider but probably of more significance are future investment returns. You need to consider where your pension fund is currently invested and whether or not that reflects yours attitude towards risk/reward and volatility. By far the greatest amounts of pension fund monies are invested in with-profits or managed funds but there is an enormous range of investment fund choice available to you. The biggest choice would be available through a self-invested personal pension plan.

With a Sipp, you get to choose the assets of your pension fund. There are regulations which set out what are and are not allowable assets within a Sipp but these allow quite a wide range of choice.

Depending on how long you expect your pension fund to remain invested, you need to choose your investment links carefully. This is true of both conventional and self-invested plans.

Make sure you spread your investment across cash, property, fixed interest and both UK and international equities to suit your personal preference and attitudes to investing.

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