Pension planning: Put providers through their paces

WE ALL know by now that we are going to have to save money if we want to look forward to a comfortable retirement. But when you start to look at personal pensions you sometimes feel that rocket science would be easier to understand.

If you are eligible to take out a personal pension, which basically means you work for an employer that does not provide a company pension or are self-employed, there are a number of key features to check. The features that make for a better pension are:

q Low charges. Finding out how charges are made can also be daunting, especially if they are all taken out when you first start paying into the pension. In these cases the pension provider will often try to disguise the charges.

Traditional pensions where you pay monthly or less regular premiums give substantial commission to independent advisers or sales people, so usually have higher charges. These can amount to anything up to the first two years' premiums. Find out if these are taken at the beginning or spread out over the policy's life. If the latter, you'll find that you have much more of your money invested and working on your behalf.

Better still, look for a policy that is constructed as though it is a series of single premiums. This means that charges will be relatively low, and you will be able to stop and start payments without penalty.

Direct insurers such as Virgin, Eagle Star, Merchant Investors, Direct Line, and most of the investment trust pension specialists, including Flemings, Foreign & Colonial and Edinburgh Fund Managers, invest over 95 per cent of your money in their funds and have annual charges of 1 per cent or less. Some impose a policy fee of pounds 1 or pounds 2 a month. These are good yardsticks against which to measure charges.

q Flexibility. Can you vary payments without penalty? If you get a substantial bonus, have a win on the Lottery, or just have some extra cash, can you pay this into your pension without incurring extra charges?

By the same token, find out whether you can miss payments and not be charged. Maybe you need to spend extra money on your business or want to take time off to bring up a family. Can you stop payment for a time and restart later on at no cost?

q Choice. Do you have a choice of funds? Most of the leading pension providers offer a with-profits or managed fund, which may suit many investors. Some of the more recent entrants to the industry offer tracker funds that mirror the movement of a stock market index.

But if you want more control of your investments, make sure the funds offer a spread of investments. This means that if you want to invest in a European or an international fund, you can do so.

If there is a choice of funds available, make sure that you can switch between them cheaply. Most groups allow at least one free switch a year. If you want to switch more often, they sometimes make a charge. If they do, make sure that it is low; you should not have to pay more than pounds 25 or so.

q Waiver of premium. This insurance costs extra, around 1 per cent of your premium, but is well worth having. It will pay you pension premiums if you cannot work because of illness or accident. Look for a waiver contract that offers you insurance for your own occupation. This means it will pay out if you cannot go back to work after illness. Beware "any occupation" contracts. With these you have to show that you cannot do any job at all before the contract will pay out.

q Life insurance. This is not always offered, but it's a useful perk. If you take out life insurance through your pension policy, you'll find you get tax relief on the premiums.

q Cash or near cash funds. Check whether the pension provider offers you the choice of cash funds. This is useful for shifting your money out of shares if you think the market is going to fall. And as you near retirement, you need to avoid a sudden drop in the stock market reducing the value of your pension fund. Moving into a cash or fixed-interest fund will reduce the risks.

q Retirement age. The best pension plans allow you to change your declared retirement age without penalty. After all, you may want to retire earlier or later than the time specified when you take out the policy. As long as it is after your 50th birthday, to stay within the personal pension rules, you should not be penalised for taking early or late retirement.

q Phased retirement. Many people prefer to phase their retirement, often by doing part-time work. A good pension policy will allow you to cash in part of your plan without penalty.

Some of these features may matter more to you than others. Make sure you go over the important points when you speak to the pension provider or a financial adviser. This way, you will ensure you have the flexibility and choice that you want.

q Contacts: Tesco Personal Finance Life, 0845 845 5555; Virgin Direct, 0345 900 900; Direct Line, 0845 3000 333; Merchant Investors, 0800 374857; Foreign & Colonial, 0181 880 8120; Flemings, 0800 413176; Edinburgh Fund Managers, 0800 838993.