Investment: Personal Pensions - Act now if you want the good life when you retire

MILLIONS OF people have no access to a company pension scheme. If you are self- employed or work for a company too small to run its own scheme, a personal pension plan is probably the best way to save for a retirement income.

But the personal pension mis-selling scandal has made many people wary of this type of investment.

Between 1988 and 1994, financial advisers hungry for commission persuaded many people to leave occupational pension schemes (or not to join in the first place) and sign up for personal plans instead.

But thousands were worse off. They no longer benefited from their employer's contributions, or from the fact that the administrative costs of the scheme were shared. The lesson to be learnt from this episode is that where an occupational pension scheme exists, it is usually the best option. But because of the tax breaks they offer, personal pension plans may be better for some people.

They are suitable for anyone who receives earned income and does not have access to a company scheme, says John Turton, head of pensions at brokers BESt Investment.

"Everyone should try to put money away for their retirement," he says. "I don't think the Government is going to look after you in old age."

The basic state pension currently pays out a maximum of just pounds 64.70 a week, although anyone contracted into Serps (the state earnings-related pensions scheme) could get more.

Government proposals for new stakeholder pensions (low-cost pensions for those on low incomes) unveiled in December, and the dismantling of Serps make clear that with only a state pension, people earning more than pounds 18,500 will be worse off when they retire than are current pensioners.

"People who are earning under pounds 9,000 will get more, and people earning between pounds 9,000 and pounds 18,500 will get a slightly better pension, but it is still not enough," says John Turton. "That's why they have to make their own provision."

Stakeholder pensions won't come into effect until 2001. And proposals are afoot for a new pensions savings account, the "Lisa" (lifetime individual savings account), which will be a personal pension that meets certain standards on charges, flexibility and portability. They will also offer a wide choice of investments.

But you shouldn't wait to start saving for retirement in anticipation of these changes, says Stephen Dight of independent financial advisers Grosvenor Financial Services. "If you delay by two years, and annual returns turn out to be around 12 per cent, then you will have cut your pension pot by a quarter," he says.

If you do start a personal pension plan in the next two years, it is vital to choose one that can be transferred easily to a new scheme - possibly to one of the new stakeholder schemes. "You need to look at level-charged products [where charges are spread throughout the life of the pension] which you can get out of without significant costs," says Mr Dight.

Providers such as CGU, Standard Life, Sun Life and Norwich Union have level charges on their personal pensions.

But about 80 per cent of personal pensions will penalise you if you stop paying into them, or if you transfer the fund after two years, says Mr Turton. This is because the bulk of the charges made by the investment provider are levied in the first few years. "The reason they have got these charging structures is because the salesman or independent financial adviser has a truckload of commission to collect," he says.

A cheaper way to buy personal pensions is through a discount broker such as BESt Investment, or Hargreaves Lansdown. Because of their high sales volumes, they can repay most of this up-front commission into the pension plan, often taking only a proportion of the level commission offered. An independent financial adviser who charges you a fee rather than taking commission should also be able to repay the commission.

There are other ways to save for retirement. Investments such as PEPs, soon to be replaced with Individual Savings Accounts, offer tax-free investment up to certain limits. These are far more flexible than pensions, which lock away your money until you retire.

But none of the alternatives gives the tax-relief on contributions that pension schemes offer. If you are a basic-rate taxpayer, for every 77p you pay into a pension scheme, another 23p is effectively added by the Inland Revenue. For higher-rate taxpayers the gains are more marked, with an extra 40p for every 60p paid in.

There are thousands of different personal pension plans to choose from, with a vast range of features. Some offer a wide choice of investments and the freedom to keep switching your pension pot from one investment fund to another. Others may be very flexible, allowing you to vary contributions and to stop and start paying in whenever you choose.

So it is vital to get good advice. "Financial products are complicated and it can be difficult to know where to go for advice," says Jackie Blyth of the Personal Investment Authority, an industry watchdog. The Financial Services Authority, of which the PIA is part, has published a booklet to help people to find good financial advice.

Grosvenor Financial Services: 01491 414145; BESt Investment: 0171 321 0100; Hargreaves Lansdown: 0800 850 6611; for a copy of the FSA Guide to Financial Advice: 0800 9173311