Personal Pension Schemes

5. What Kind of Pension Plan?

Once you have decided on a personal (or stakeholder) pension, you need to decide what kind of investment you want. The type of investment that is right for you depends on the balance you seek between risk and reward.

5.1 With unit-linked plans, your fund is split into equal 'units', which rise and fall with the underlying value of the investments.

• If your fund is invested in shares, it should perform well over the long term, but its short-term value could be very volatile.
• You can limit the volatility by investing through 'managed funds', which hold a wide spread of investments.
• Most investors switch to safer cash or gilt funds as they approach retirement.

5.2 In a with-profits plan, you get a share in the profits of the fund, rather than a share in the fund itself. Your investment is less vulnerable to stock market volatility, but is more likely to have penalties if you transfer the fund to another provider.

5.3 Most modern with-profits plans are 'unitised' - designed to combine the virtues of both unit-linked and with-profits plans. For example:

• Your fund will be boosted each year by an annual (or 'reversionary') bonus.
• You are likely to receive a 'terminal' bonus when you retire. The size of this bonus is not guaranteed. It depends on the performance of the stock market and the company's bonus policy.

5.4 Deposit schemes are generally run by building societies.

• The main benefit is safety. But most investors will be better off investing in share-based schemes.

5.5 Unit trust and investment trust plans invest your contributions in pooled investment funds.

• Initial charges may be high, but ongoing charges may be lower.

5.6 Stakeholder pensions are personal schemes designed to be cheap and flexible.

5.7 Executive pension plans and self-invested personal pensions (SIPPs) tend to have higher charges and generally appeal to higher earners. SIPPs allow greater investment choices. Executive pension schemes are classed by HM Revenue & Customs as company schemes.