Your worst personal nightmare; PENSIONS

Choosing a personal pension from the myriad schemes available is a nightmare. The information with which to make an informed choice is simply not available to the general public, which is left with two options.

One is to put on a blindfold and stick a pin in a list of personal pension plans. The other is to seek the advice of an independent financial adviser and hope that he or she is competent.

While the first option is a lottery, the second may be equally so. The savings industry's favourite caveat - past performance is no guarantee for the future - is particularly true in the long-term world of pensions. Funds that put all their assets in equities are bound to do well in a bull market. However, they may not perform well in a falling market and few would bet against a bear market in the next 20 years.

Even comparisons of the past performances of personal pension funds are fraught with difficulty and may not necessarily be meaningful. Individual fund performance varies considerably depending on the time scale looked at. It may also alter suddenly if the fund manager leaves.

The performance table of the largest unit-linked funds (right) also shows how each fund ranked over the past five years, the right hand figure representing the decile (10 per cent) in which it was placed.

A key factor in the choice would be a consistent performance over the years. But when judging future performance additional research is needed. For example, the actuaries Bacon & Woodrow interview top-performing managers to see if their strategies are likely to produce similar results in the future. From this research is drawn a list of favoured managers.

But fund performance is only one element of a confusing equation. There is also a bewildering array of charges to consider and the suitability to an individual's future working pattern. And there is no guarantee that the potential buyer is going to get the right advice - as the projected £2bn compensation bill for the personal pensions transfer scandal showed.

If you decide on a personal plan you will need to choose between a "unit- linked" scheme, which is riskier but generally more profitable, and a "withprofits" plan, which is safer but not so lucrative. With-profits schemes, which guarantee a relatively small return each year and a large "terminal bonus", follow a more conservative investment strategy. But charges are weighted towards the larger contributors so they are better value for smaller investors.

Because terminal bonuses have been falling, so has the popularity of with-profits schemes.

With unit-linked plans, the value of the plan varies day by day as the value of the units fluctuates. For someone with less than 10 years to retirement, there is clearly a greater risk with this type of plan since the final value is fully exposed to adverse market movements.

On the other hand, someone with, say, 30 years to retirement is likely to get a better return with a unit-linked plan. It is also possible to switch between unit-linked and with-profits schemes within most pension plans.

Unless the law changes, your income in retirement will be largely determined by the value of the annuity you can buy. And that depends on the prevailing interest rates at the time. The best you can hope for is to pick a consistent fund that at least matches the performance of the FT-SE All share index.