The beginning of the new tax year in April brings with it new pension freedoms and Prudential’s ‘Class of 2015’ retirement research suggests expected retirement incomes have hit a six-year high as retirees switch on to this opportunity.

Making sure you are financially prepared for later life is paramount for everyone. You might not be giving up work for decades or you could be as little as a few years away from that milestone. Whatever your circumstances, changes to the pensions system are a good spur to look at the state of your own retirement planning and to give serious consideration to whether you might benefit by opening a SIPP (self-invested personal pension) and enjoying the flexibility and functionality provided by this option.

Announced in the March 2014 Budget changes to the pensions framework mean you will have three main alternatives at retirement: buy an annuity (an insurance-like product providing an income for life); drawdown regular chunks or take an income from your pension pot as and when you wish; or take the lot in one go. Up to 25% of your pension can be taken tax free with the rest taxed as normal income.

Barclays Stockbrokers vice president Catherine Penney says: ‘The pension rule changes that come in from April 2015 offer greater flexibility in how pension savings are withdrawn. A SIPP - which by its nature is flexible, allowing a wide range of different investment choices, as well as offering options as to how benefits are drawn within the current rules - is well placed to allow confident investors to take maximum advantage of the new rules from 6 April, permitting access to savings in either lump sums or through regular income withdrawals.’

Amid the current clamour around pensions you should never lose sight of the fundamental purpose of saving for retirement as Vince Smith-Hughes, retirement expert at Prudential, explains: ‘The rule changes don’t alter the basic principle of needing to secure an income that will last throughout retirement. The best way to secure this is for people to save as much as possible as early as possible in their working lives.’

What should you do if you don’t have a pension?

Although most of us will have some form of pension provision - particularly since the introduction of automatic enrolment which now applies to all but the smallest businesses (54 people or less) - you may not yet have begun saving for retirement, perhaps even taking the decision to opt out of your employer’s pension scheme.

There are more than enough pressures on household finances - and a prolonged spell in the wake of the financial crisis in which wage increases failed to keep pace with inflation has not been helpful. However Britons’ earnings are now starting to rise in ‘real terms’ and if you are fortunate enough to be a beneficiary of this trend you should consider putting at least some of your monthly pay cheque into pension savings.

After all, as Danny Cox, a chartered financial planner with Hargreaves Lansdown, notes: ‘The state will not provide. Well it does, but from April 2016, only around £150 a week assuming you have a full national insurance record and for most people this is simply not enough to enjoy retirement. And the age when this will be paid is gradually moving back so those entering the work place now won’t see their state pension until age 68.

‘The two biggest factors which determine how big your pension savings will be at retirement are the amount you pay in and the length of time you save for. The next most important consideration is the performance of your pension funds, followed by charges. It’s important not to be in an expensive pension scheme but much more important is to start saving as soon as you are able.’

Cox adds: ‘If you can join a company pension scheme where the employer contributes you should do this at the earliest opportunity.

‘No plan works without taking action. Most private pensions will allow you to start saving from just £25 a month. On its own this won’t give you the millionaire’s lifestyle in retirement, however it is an important foundation you can build upon as your income increases. Most people start small and then work their way up.’

Contributions to a pension are paid net of basic rate tax with a rebate paid directly into the pension plan. So for a basic rate taxpayer every £800 paid into a pension is boosted by a £200 rebate. At present higher rate (40%) taxpayers can claim an additional £200 of relief through their tax return - which reduces the cost of a £1,000 contribution to £600. Those paying the current additional rate of 45% can claim a further £50. Your maximum annual contribution is currently £40,000 and your lifetime allowance is £1.25 million.

Katie Burgess, SIPP and ISA (individual savings account) specialist at Redmayne-Bentley says: ‘When planning what to do with your pension, or considering planning to make provision for your retirement, I believe one of the main things to consider is how much income you think you will need. Ideally, by the time you come to retire, some of your larger expenses like a mortgage will have been paid off so the level of income required will usually be lower than during your working life. However, expenditure on extras such as leisure activities and holidays may increase.’

How to organise your existing pensions

As we lead increasingly fluid and mobile careers moving from job to job and sometimes even shifting careers entirely it is easy to lose track of cash you put into a pension scheme. There’s some good news as the government is tripling the size of its free Pension Tracing Service (details of which can be found at https://www.gov.uk/find-lost-pension).

Last year the service was contacted 145,000 times, double the amount of calls taken four years ago. In around 87% of cases last year and the previous year PTS staff were able to put people in touch with a former pension provider. It is then down to the individual to contact the scheme to find out if they have a pension. The most common reason for losing track of a pension is when an employee doesn’t tell a former employer of a change of address.

Estimates suggest that there could be as many as 50 million dormant and lost pension pots by 2050.

The government is also expected to announce more details on a proposed ‘pot follows member system’ which minister for pensions Steve Webb says will be in place by autumn 2016. This would see pension pots from past employers with a value of £10,000 or less transferred to an employee’s existing scheme.

With final salary pension schemes largely consigned to the dustbin of history it is worth thinking about whether you should supplement your retirement funds through a personal pension. This can also be a good way of consolidating your pension funds in one place.

There are three main types of private pension: a stakeholder pension, a personal pension and a SIPP. A stakeholder pension is the simplest option with a limited range of fund choices (typically around 10). A personal pension has much greater choice of funds (upwards of a 100) but a SIPP provides the greatest level of choice - with many providers offering thousands of funds, shares, exchange-traded funds, gilts and corporate bonds.

‘A SIPP could be right for you if you are looking to build up a pension fund in a tax-efficient way, are prepared to commit to having your money tied up, normally until at least age 55 and want access to wider investment opportunities, such as a portfolio of listed stocks and shares,’ explains Charles Galbraith, managing director of investment platform provider AJ Bell Youinvest.

‘However, you must understand growth is not guaranteed, as the value of investments can go down as well as up. In addition, a SIPP may not be suitable if you want unrestricted access to your cash or only wish to access to a more limited range of investments, such as those available under insurance company personal pension or stakeholder pension plans.’

If you want to open a SIPP you have two main options, though they are not mutually exclusive:

• You can make new contributions through monthly payments or a lump sum;

• You can transfer assets from any existing pensions.

By consolidating existing pension funds into a SIPP you may also find it easier to keep track of your retirement savings. As Hargreaves Lansdown’s Cox notes: ‘SIPPs generally provide more planning tools and calculators to help with your choices, investment research to help you pick funds and online functionality, meaning you can view your SIPP online 24/7 and with some providers also via mobile apps.’

The process should be relatively simple. In theory all you need do is contact your SIPP provider and provide details of your existing pensions. They will then arrange any transfers. The types of pension which can be transferred to a SIPP include:

• Personal pension plans

• Stakeholder pension plans

• Retirement annuity contracts

• Other SIPPs

• Free Standing Additional Voluntary Contribution Plans (FSAVCs)

• Executive Pension Plans (EPPs)

• Most paid-up occupational money purchase (defined contribution) plans

Choosing a SIPP

There is significant granularity within the SIPP market. For individuals, costs can vary substantially between providers and different plans so you need to do some homework before you get started. Typically there will be a flat admin fee, an establishment charge and all the relevant charges of dealing in the underlying assets.

AJ Bell Youinvest’s Galbraith says once you have decided to open a SIPP, you must then find a SIPP provider. ‘You want to find one that is financially sound, has a good reputation and provides not just a cost-effective service but a high-quality one,’ he adds. ‘You may want to be able to deal via your mobile phone, for example, require reassurance on the issue of IT security and will want to know technical support will be offered by a help desk in the event of any problems, such as losing your password.’

The financial services industry now splits products into two main categories:

• A SIPP Lite would typically be online, execution-only, low cost and offer a limited range of investments. Plan values start at around £50,000.

• A Full SIPP requires the use of an IFA and is more expensive but does allow for a greater degree of flexibility.

There are an increasing number of low-cost SIPPs and leading providers include Alliance Trust, Hargreaves Lansdown, Killik & Co and AJ Bell Youinvest. Leveraged instruments are not an option when it comes to these products but you can still typically invest in a wide range of funds, Main Market-listed and AIM-quoted shares, exchange-traded funds (ETFs), investment trusts, convertible securities, government and corporate bonds, and, at a push, warrants.

Although low-cost SIPPs are a good option, it is important to ensure you are benefiting from extra flexibility compared with other personal pensions. A SIPP Lite which offers access to a limited or in-house selection of funds is probably not worthy of the name.

Redmayne’s Burgess says: ‘One of the most common mistakes that I have come across is where someone has chosen a SIPP product which does not suit their circumstances. If you wish to take advantage of the more esoteric investment options available within a SIPP, you should ensure that the SIPP provider you choose allows your intended investments.

‘Otherwise, you may have to transfer the SIPP to another provider, resulting in additional charges and the inconvenience of making the transfer. This can also apply where a client opens a SIPP allowing a wide range of investment options and can therefore have a higher administration fee. If the client does not take advantage of the wider range of investment options then they are paying for a service which they are not using.

‘The best way to avoid ending up in a SIPP which is inappropriate for your circumstances is to research the various products available. The majority of SIPP providers will offer more than one product so make sure you look at the options available with each provider.’

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Monitor your pension

Pension planning is not a one time exercise but an ongoing process. You will need to check you are on course to achieve the required income from your pension as interest rates and returns from different assets fluctuate. As you get closer to retirement you may also want to change the shape of your portfolio. As a rule, equities and other higher risk and often higher return options make sense if you have at least 10 years until you retire.

This allows time for the value of your portfolio to recover if there is a sudden correction in the markets. As you get closer to drawing funds from your pension you will want to turn to less volatile investments - such as government bonds - which offer guaranteed income and reasonable security of return.

Hargreaves’ Cox says: ‘The most common mistake is to start paying into a pension but then not review on a regular basis. You regularly need to check you are saving enough, investing in the right funds and are on track to retire when you would like to, being able to afford the lifestyle you aspire to live. Most people start saving modest amounts and then build them up over time. However if you don’t ever increase your contributions you might end up disappointed at retirement, when it is too late to do something about it.’

Comprehending changes

Complicating matters is the constant tinkering by politicians to the pensions set-up. Sometimes changes are widely seen as being positive - as in the case of the new freedoms taking effect in April - but you shouldn’t allow this background noise to distract you.

Not all alterations to pensions are likely to be so benign. As Cox from Hargreaves Lansdown notes, both Labour and the Liberal Democrats have pledged to change tax relief for higher earners and he argues savers should maximise their tax reliefs now given the uncertainty over the outcome of May’s general election.

Burgess from Redmayne adds: ‘We have seen a lot of changes to the rules regarding pension savings over the past few years. With a general election fast approaching I think it is reasonable to expect some changes in the immediate future with a potential for additional changes further down the line.’