Who's got your money?

Pensions

It is quite likely that there is a whole generation of people growing up believing that the words pensions and scandal go together like fish and chips. Sometimes it does seem as if the only time we hear about pensions is in conjunction with some kind of fraud or rip-off.

There are two main reasons for this. The first was the widespread mis- selling of personal pensions by unscrupulous commission-hungry salespeople over the last 10 years, which has led to many pension providers having to pay out compensation to thousands of savers.

The second reason went overboard in the Atlantic. The way in which the late Robert Maxwell treated company pension funds put pressure on all pension schemes as members questioned whether their cash was safe, or whether it was open to the fat fingers of anyone greedy enough to steal it.

The good news is that the financial industry and the Government have been cleaning up the pensions world. New laws should put an end to Maxwell- style pensions management, ensuring that our pension pots are still there when we need them for retirement. Sales staff in the pensions industry now have to operate to strict guidelines, although there is still a huge backlog in settling compensation for the years of mis-selling.

One of the changes has been to allow people who benefit from pension schemes to sit as trustees of the schemes. The aim is to give those who will benefit a much greater say and understanding in how pension funds are being administered. Additionally it was thought that their vested interest would ensure that the schemes are run for the benefits of members and not outside parties.

If member trustees become unhappy with the way their scheme is being administered they can complain to an Occupational Pension Regulator who has powers to vet and discipline pension scheme trustees. A compensation scheme was also set up that pays out up to 90 per cent of any losses incurred by victims of pension fraud or theft.

This all means that even if your pension fund gets into trouble through mismanagement or bad investing, your cash should remain secure. In effect, the new rules force trustees to ringfence certain funds in their schemes to ensure that there is enough cash to pay out for decent pensions if things do go wrong.

With a personal pension, or a company scheme that operates on a money purchase basis, you build up a pension pot to buy an income in retirement. So your retirement income will depend on how well the insurance company that is looking after your pension contributions has invested your cash.

If you have a personal pension you will definitely need to consider your investment strategy - and in fact there is a whole series of decisions that you need to think through. You have to choose a provider, think about the type of plan you want and the investment strategy you wish to follow. There are plenty of pension providers, from insurance companies to banks and investment houses. Most will have a range of plans and a number of funds to invest in covering all aspects of the risk spectrum, from safe, to high-risk. The safest funds are cash and gilt funds that have a fixed return. With-profits funds set aside a bonus each year that can never be lost no matter how the fund performs in later years, which means they have a built-in safety mechanism.

Riskier funds are those that invest in shares or similar investment vehicles. Some invest in shares of large well-known companies in the UK, US and continental Europe. Others invest some of their funds in emerging markets or smaller companies, which carry a greater risk, but offer the potential for much greater rewards. Investment-linked policies have increased in popularity in recent years because of their greater potential for growth. But the generally-accepted best advice is to start switching into the safer with-profits policy or fixed interest investments when you come towards the end of your investment term - say within five to 10 years of your planned retirement date.

As with anything in financial services there will be charges to pay and these can have a big impact on the value of your pension pot. Charges may include front-end loading, which means that in the early years of your pension plan a significant proportion of your money is being eaten up by charges rather than being invested on your behalf.

With such a wide range of factors to consider, how do you decide on your personal pension? Do not rush in. Send for information from several different providers and compare the plans, think carefully about investment strategy in terms or risk and reward and look closely at the level of charges.