The pain of upfront charges is eased if you keep the plan going

personal pensions

A personal pension is the first investment product anyone who is self-employed and thinking about retirement planning is usually told to take out. Not everyone accepts the argument, however, claiming private schemes offer poor value. If you are self-employed and thinking about a scheme, how do you get value for money?

Fiona Price, a financial adviser at London-based Fiona Price & Partners, says: "Care is needed when making your selection. The self-employed and women in particular may not have very predictable patterns of employment. Look at a number of factors including charging structure, fund choice and what happens if you have to stop and then re-start contributions, or are unable to continue work due to ill health."

Understanding the basis for charging structures helps in choosing the pension that is most appropriate to your circumstances.

For example, when you pay premiums into a pension these are used to buy units in your chosen fund. The pension company will have an "allocation rate" - the difference between the price at which you buy units and at which you sell them back to the provider at transfer or retirement.

Standard Life has a running allocation rate of 95 per cent on its personal pension, while Norwich Union offers an allocation of 100 per cent. This makes the Norwich Union plan look a less expensive way of building a pension fund.

Yet on premiums of pounds 50 per month over 30 years, Standard Life deducts only pounds 100 from the first year's premiums, while Norwich Union charge pounds 301. After five years, Standard Life is still ahead with deductions of pounds 574, against Norwich Union's pounds 1,080.

This is because Standard Life imposes level charges on its pension plans, which means you pay the same amount each year throughout the life of the policy. Others, like Norwich Union, still levy front-loaded charges. These front-loaded charges are based on the contributions you agree to make when starting the plan, and will be deducted in full even if you do not stay the course. If you think you are unlikely to keep payments up, don't choose front-loaded charges.

What may be even more surprising is that each company pays almost identical amounts in commission to financial advisers who sell the plans. In the case of Standard Life up-front commission is pounds 390 plus pounds 23.40 each year over the policy term, while Norwich Union pays pounds 398.81 plus pounds 23.93. If contributions increase so does this "trail commission" to the adviser.

If you are unable to continue paying premiums after five years, the transfer value of the Standard Life plan would be pounds 3,460, while the Norwich Union plan would stand at pounds 2,850 assuming both funds grew at 9 per cent each year. Transfer values are theoretical; they estimate the cash value of the policy if you choose to switch it to an alternative pension provider. But they also serve as a useful benchmark for the value of a paid-up policy left in place to grow until retirement.

Fiona Price points out, however, that the right policy depends on individual circumstances: "Level charged plans are cheaper if you stop and start them. But front-loaded plans can cost no more if you stay the course and complete payments."

This can be seen from Standard Life and Norwich Union's plans. After 10 years their values are pounds 9,810 and pounds 9,070 respectively, and the gap continues to narrow.

A further point to watch out for is "premium waiver". This is a form of insurance whereby, if you are unable to work due to ill-health or disability, the pension payments you would normally have paid will continue to be paid into your plan until retirement. Waiver of premiums usually cost between 1 and 3 per cent of premiums normally paid.

But the terms of these contracts can vary widely, from inability to do your existing job or inability to do any to which you are suited, through to inability to work at all. Just as important, some waiver contracts are indexed to rise in line with premium increases, while others are not. Again, it pays to check carefully to see whether it is worth taking out this policy.

Fund choice is another key issue. Ms Price warns: "You must match your personal attitude to risk to that of funds available. Women are often too conservative. In a pension fund risk usually equates to the potential for a fund to fluctuate in value.

"The longer you have until retirement, the greater the risks you can afford to take." Here, it makes sense to switch to lower-risk funds the closer you come to retirement so as to protect your existing savings. Most pension providers offer a range of funds of varying risk. If the choice is not wide enough for your long-term needs, it may make sense to look elsewhere.