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PLANNING FOR RETIREMENT

10 Tips for picking pensions

1. How do I choose the right pension fund?
The first thing to do is to decide which type of pension you should have. If you work for a company that offers an occupational scheme, you should almost certainly join it. Company schemes are usually far more generous than personal pensions because employers make contributions on your behalf.

Following the introduction of stakeholder pensions virtually all employers must designate a stakeholder plan for employees. This simply means that the employer must select a stakeholder plan, give details to employees and deduct contributions from salaries if employees chose to join. There is no requirement for an employer to contribute to a stakeholder scheme.

Individual stakeholder plans are similar to personal pension plans but must satisfy certain criteria e.g. minimum premium of no more than £20, maximum annual charge of 1% etc.

If you decide to take out a personal pension plan, you will invest in choice of funds offered by the pension provider. Your choice of funds will depend on your attitude to risk - please use this link to assess your attitude to risk. For example you may chose to invest in equity funds or a "with profits" fund. Equity funds are riskier investments than "with-profit" funds, but they could grow at a faster rate. Take advice on the funds you choose to invest in - it will depend on a combination of your circumstances and your own attitude to risk.

2. Which is the best pension company?
There is no right answer - it depends on your requirements and circumstances. Different companies offer various terms and conditions on their personal pensions that suit different people.

3. Can I stop paying without penalty?
Flexibility is one of the most important features of a pension. In general terms, pensions force you to make a trade-off between policies with little flexibility and expensive schemes that allow you as much freedom as you need. With some non-stakeholder schemes you may be penalised through higher charges or a lump sum penalty from your fund, even if you stop contributing for just a couple of months. Others will close the pension altogether. Most advise their clients to opt for the most flexible pensions. Stakeholder pensions must allow the holder to vary or stop contributions without penalty. They must also allow penalty free transfers.

4. Where can I get a cheap pension?
There is no such thing as a cheap pension.

5. How much should I put into my pension?
To retire on half your final salary, the Sunday Times suggests you divide your age by two - that is the percentage of income you should contribute.

6. How much am I allowed to put in?
For people in company schemes, the maximum contribution is 15% of salary. There is no specific limit on how much the company can pay on your behalf but the upper amount is governed by the maximum pension stipulation of 2/3 salary and the earnings cap.

With personal pensions, the limit is the higher of £3,600 and a percentage of earned income related to your age. If you are under 36, you can contribute a maximum of 17.5% of your income each year subject to the earnings cap. Between the ages of 36 and 45 it rises to 20%; from 46 to 50 it is capped at 25%; it goes up to 30% between 51 and 55 and 35% from 56 to 60.

7. What other features should I look for?
Performance and charges are the key. Insurance companies and financial advisers can provide projections of their personal pension performance, based on a variety of assumed growth rates. Using their figures, you can see the impact of the charges on the maturity value. Insurers can also provide year by year breakdowns of the transfer value - the amount you could transfer to another policy.

8. Will I be able to retire early without penalty?
Sometimes the company will penalise you for every year you retire early. Your IFA should be able to the names of providers who impose such penalties.

9. What is the best way to make payments?
For most people a regular-premium policy, where your contributions are made monthly by direct debit, is best. However, if you are putting in £10,000 a year or more, it is probably better to make a series of single premium contributions because of the way the charges operate.

10. Can I control how the fund is run myself?
You can through something called a self-invested personal pension (SIPP) which allows you to choose how your money is invested. In the early years you may want to take risks - then switch into more secure funds as you near retirement. However, SIPPs can be expensive and are usually recommend for people who have at least £50,000 to invest or who pay regular premiums of at least £500 a month.

REMEMBER You should not use any information contained on this page as the basis of any action until you have discussed matters with your financial adviser.