Breaking cover: The hidden details of pensions are flushed into the open

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The Independent Online
As the Government continues to stress the importance of making private pension provision, what are Britain's 100 pension companies doing to make it easier for us to choose between them? How do you choose between Allied Dunbar and NatWest Life? How can you know that the company with which you have entrusted your retirement income will do a good job of managing your fund?

Sadly, there is no real guarantee of finding the best plan. But by looking closely at the performance of funds, and taking into account charges levied by the pension provider, you'll be able to make a reasonably informed decision.

Comparing performance is useful, although good past performance will not necessarily mean that performance will remain as good in the future.

It is often unwise to pick the top-performing funds as investment trends tend to be cyclical. Remember, today's league-leading fund could be tomorrow's relegation battler.

Consulting actuaries, Bacon & Woodrow, predict that intense competition among pension providers will force many mediocre companies out of business, or into mergers, leaving a handful of dominant firms. The costs of merging could eat into the value of your fund.

Performance alone should not be the only factor in your decision-making process. It's just as important to look closely at charges, which are likely to reduce the value of your pension fund by about a fifth, but a recent survey suggested that the highest charges will reduce the value of your pension fund by as much as a third. Think what you could save by finding a cheap provider!

Before you decide to buy a pension policy, you must see a key features document which should set out clearly and simply the charges you have to pay to a pension provider. These have been part of pension companies' service offerings since January 1995, when the new disclosure regulations came into effect. All fees must be included, both the initial set-up charges and any monthly or annual management fees. It should also detail how much commission is being paid to the adviser who recommended a particular plan.

The first part of the key features document takes the contributions you will have made and shows the size of the pension fund you will have built up according to three rates of growth - six, nine and 12 per cent.

All insurance companies use the same growth rates for their illustrations. The figures will differ between pension providers because they take account of all the charges and these vary widely from company to company.

The document will also show the amount your financial adviser will receive from the pension provider for selling its plan to you. Different commissions are paid by different companies and will depend on the size of your monthly premium and the length of the policy.

If you think the commission is too high, take it up with your adviser. Some may be prepared to rebate some of their commission and most fee-based advisers will rebate all the commission back into the fund.

The transfer value is the amount of cash you would receive if you were to move your fund to another pension scheme before you retire. Most of the charges levied are incurred in the early years, so transfer values in the first few years will be extremely low as commissions and monthly charges will take a huge chunk out of what is left. In the first year, for example, your financial adviser's commission alone might wipe out the value of your contributions.

A column headed "Total Actual Reductions To Date" will show how much of your fund is disappearing each year through charges. After the first couple of years the amount of actual deductions will stop growing so rapidly, as the set-up costs of your pension will have been absorbed. After that has happened, the costs will only increase as monthly and annual charges are added.

There will then be another column headed "Effect Of Deductions To Date" which shows how much the money taken in charges would have grown to if it had been left in the fund. In effect, that's the real cost to you because the cash would have otherwise grown in line with the rest of your investment.

The reduction in yield figure is crucial since it puts charges into perspective by showing how much is shaved off fund performance every year. A small increase in this figure can have a big effect on the size of the final pension fund.

The key features document provides some means of making a comparison between different pension companies. But the document should be backed up by clear information from your financial adviser and the pension provider.

Don't be afraid to ask questions at all stages of the pension-buying process - it could save you making a costly mistake.

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