Your Money: Planning to retire? Get personal

So, a personal pension is still a good bet. But which one to choose? Nic Cicutti looks at the options
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The Independent Culture
The Iron Chancellor he may be to many commentators, but Gordon Brown revealed a softer side to his personality last week as his Budget spared hundreds of thousands of existing and future pension-holders from much financial pain.

Mr Brown chose to say nothing about cutting the generous tax concessions presently available to holders of personal pensions.

At present, the Inland Revenue pays pounds 23 out of every pounds 100 paid by individuals into their personal pensions. People on a higher rate of tax can reclaim pounds 17 from the Revenue for every pounds 100 contribution they make into a private scheme. The rules, though slightly different, confer similar benefits on the self-employed.

It had been feared, however, that the Government was planning to scrap this extra benefit to higher-income earners.

The Government's decision to spare personal pension holders is good news. But the staying of this measure leaves open the possibility of some unscrupulous pension providers selling their products on the basis of "fill your boots ahead of the next Budget".

So what are the simple rules to observe when considering which personal pension to choose? My advice is to do some research on the companies. Then prepare a table, taking each of the following points in turn, with a high mark for a good score and a low mark for poor scores. Add them up at the end and the highest scoring fund wins. Here follows a highly individual marking system.

Always check its past performance over three, five, seven, even 10 years. Personal finance pages, including The Independent, regularly run stories on this issue. So do specialist publications (available in newsagents) such as Money Management and Planned Savings. Another publication, MoneyFacts, is a monthly magazine with details of the best funds, sector by sector.

Look for consistency: a fund that remains in the top 25 per cent of funds in its sector year after year (upper quartile performance) is better than one that shoots in and out of the top. This is linked to "volatility", where performance varies wildly year after year.

Ten marks: five for regular "mid-quartile performance", eight for upper quartile and three for bottom-quartile performance.

Charges can take away a big chunk of your pension savings. They include the setting-up cost of the pension, the commission paid to the adviser and the annual fund management fee. Over a lifetime of a pension, this can take up to 30 per cent of the fund's value.

Worse, in some cases, the way charges are structured, individuals who have paid into a pension for a few years and then stop (because of divorce or unemployment, perhaps) find that their pension pot is actually worth a fraction of their contributions.

So, aim for a company whose charges over the lifetime of a pension will be no more than 1 per cent a year or thereabouts. Equally important, look out for products that don't penalise you in the early years: what most people need is level charges throughout the product's lifetime.

Eight marks, of which six for companies with flat charging structures, four with low annual charges below 1.25 per cent, two marks for charges above 1.25 per cent a year (including everything). Seven marks for level charges that still come in at less than 1 per cent a year.

Following on from this, flexibility also means finding a pension product where you can halt contributions briefly, reduce them, increase them where necessary - and all without paying extra penalties for doing so. If you are starting out, you may feel unsure of what companies to go to and may feel unhappy with that provider.

You should ask what the company's policy is in the event of you wanting to move to another company (something knows as "pension transfer". Some companies will charge hefty amounts, others less. One, Eagle Star, promises that if you aren't happy in the first two years, it will not only transfer you but waive all management charges in that period.

Up to six marks for flexibility, four for a flexible product, none for one where heavy charges are levied when contributions are halted or on transfer.

If you are sick or have had an accident, you need to know that your pension contributions are going to be kept up. This is a form of insurance known as "waiver of premium". Find out whether the company offers this. Three marks out of six if it does, five if it defines your disability as not being able to do your job, as opposed to any job (former brain surgeons might still be expected to stack supermarket shelves).

In recent years, a plethora of companies have begun to offer cheap pensions over the telephone, including Eagle Star, Equitable Life, Merchant Investors, Scottish Widows and Virgin.

This is a positive development that helps bring down prices overall. But you should still expect two things: decent service, where a company can come round to see you - only if you wish - and where you get some choice between funds. Some will only offer one, perhaps two low-cost funds: You need to be able to choose between at least five or six funds. So, four marks are available here - of which two are for a choice of funds, one more if a company can send out someone to see you at your request.

`The Independent' has produced a `Guide to Direct Pensions', written by Nic Cicutti, its personal finance editor. The 26-page guide, sponsored by Eagle Star, cover a range of topics linked to retirement planning. It is available by calling 0800 776666. Or check the coupon at the bottom of this page.

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