It's good to get personal

YOUR MONEY The fourth in our series on pensions explains how to make the best of a private plan

PERSONAL pensions have acquired a bad name, but they should not be shunned by people whose only other option for retirement is the state pension.

There are two reasons for the bad reputation. First, personal pension plans were sold to people who would be better off in an employer-run scheme. Second, they can have high charges.

But for those who don't have access to an employer's scheme, a personal plan can provide an essential top-up to the meagre state pension. And the high costs of some personal plans are now easier to avoid. New rules require personal plan providers to show the impact of their charging structures on standard investment returns. It means you are given projected returns taking account of current charges, and can compare policies more easily.

A caveat is that the projected investment returns are standardised. Actual returns can turn out to be different. It is possible that a provider with high charges could more than compensate for this through superior investment performance.

Should you go for a plan where the impact of charges is less over 20 or 30 years, or one with lower charges in the early years but higher charges overall? The plan with lower charges in the early years could be the better option, for a reason which goes to the heart of personal pensions problems. Personal pensions are long-term savings plans. But in practice, your circumstances can change.

You may have the opportunity to join an employer's scheme or you may have a break in your career. The charges levied on some plans mean you can be heavily penalised if you fail to keep up payments. Fortunately, providers are introducing plans which offer maximum flexibility without penalty. That means flexibility on when you retire, on how much you pay in, on varying contribution rates and even on stopping payments.

These are the sort of plans to go for. Ask about flexibility and find out, too, what penalties there are on transfers.

The actual pension income you'll get from a personal plan is unpredictable. It depends on how much you pay in, how well the investments are managed, the level of costs, and how much pension income your fund will buy in the form of an annuity. Annuity rates can fluctuate.

The best course of action is to get an adviser to project what a given level of contribution might be worth. You'll find that quite high levels of contribution are needed to produce a reasonable retirement income, especially if you don't start a plan until you are into your thirties or forties.

You may want to split your contributions among several funds. Higher- risk investments are more suited to younger people. When you get within five to ten years of retirement, you should consider switching to a lower- risk fund.

If you don't trust the investment professionals, you can opt for a Sipp - a self-invested personal plan. The provider gives you the approved pensions shell and administration, and you choose the investments.

You cannot pay into both an employer's scheme and a personal plan at the same time. But you can join both if you have different sources of income.

o Next week: what to do with a company pension when you change jobs.