When to stick or twist in the pension game

CHOOSING to opt out of a company pension scheme and into a personal one is a decision fraught with danger.

The choice is complicated by the fact that it will depend on whether you are still employed by the company running the scheme or have changed jobs.

Dispassionate advice is sometimes hard to come by. Commission-hungry salesmen are often to blame for poor advice about pension scheme transfers.

Is your pension scheme based on a percentage of final salary?

Many schemes, whether in the public or private sector, work this way. On retirement, you receive a pension based on the number of years you have been with that employer, two- thirds of final salary for 40 years' service.

The advantage of a final- salary scheme is the security it offers to those who plan to stay with one employer for a long time.

For those who switch jobs often, or women forced to leave work to care for children or dependants, it may not be the best option.

What about money-purchase schemes?

These rely on the performance of the fund managers who invest your contributions - a good performance will give you a decent pension and a run of poor investment decisions will dent the eventual pension.

Some employers' pension schemes and all personal pensions are run as money-purchase schemes.

In a company scheme, you and your employer pay in an agreed amount each year. Usually, with a personal pension, you alone are paying into the scheme. At retirement, you can receive a tax-free lump sum plus an amount with which to buy an income for the rest of your life.

An advantage of money purchase is that if fund growth is good, it may take less time to reach the two-thirds of earnings that is the maximum pension allowed by the Inland Revenue. The disadvantage is that it gives less security than final-salary schemes.

Should I transfer out of a public sector scheme and into a personal pension?

No. Your final salary scheme is guaranteed to match inflation, no matter how high it rises.

Depending on which scheme it is, there may also be additional benefits, such as widows' and dependants' pensions, or early retirement options.

What about private sector schemes?

It is not usually a good idea to transfer out of a scheme into a personal pension if you are still employed by the company running the scheme.

Private-sector employers' schemes may often be slightly less generous. Yet the best ones offer a range of benefits similar to those of state schemes, such as payments to dependants. A transfer could wipe out a large part of what you have paid into your existing fund.

If tempted to transfer, ask the would-be pension provider how much its fund needs to grow each year to match what you would receive from the employer's scheme, including any additional benefits.

Some experts believe that if it is more than 10 per cent, you should be careful. On the other hand, the average growth of managed pension funds has been almost 79 per cent over the past five years, or 16 per cent a year.

Fund management charges would take about 1.7 per cent per year. With money-purchase schemes, it makes little sense to transfer to a personal pension unless the existing fund's performance is bad.

Similarly, do not switch even after you have left your present job.

Is there ever a case when a transfer is a good idea?

If you change jobs often, it may pay to have a personal pension. You may then want to transfer your funds from other occupational schemes into the pension. Otherwise, you would get slivers of pension from different employers.

Personal pensions also give the option of retirement at 50, together with greater freedom to invest in areas of one's choice. By choosing higher-risk investments, you can try to boost the final amount of your pension and hope to reach the two-thirds maximum.

Where possible, try to persuade your new employer to make a contribution towards your personal scheme.

If I have been wrongly advised to transfer, what can be done to rectify the situation?

Regaining your original level of benefits is called reinstatement. A company that accepts you were poorly advised must pay to reinstate you in your old fund; or it must put enough money into the new fund to give you back all the benefits you lost. The aim is to restore you to the position you were in before the transfer.

Reinstatement is expensive. In one recent case, Albany Life had to pay more than pounds 20,000 to reinstate a teacher in her old scheme.

What should I do if I think I have been wrongly transferred into a personal pension?

Complain to the company that sold you the scheme, and to its most likely regulator, Lautro (the Life Assurance and Unit Trust Regulatory Organisation), Centre Point, 103 New Oxford Street, London WC1A 1QH.

If you bought the pension through an independent financial adviser, write to Fimbra (the Financial Intermediaries, Managers and Brokers Regulatory Association) Hertsmere House, Hertsmere Road, London E14 4AB.

Should their replies disappoint, contact the Securities and Investments Board, Gavrelle House, 2-14 Bunhill Row, London EC1Y 8RA.