Personal Pension Schemes

4. What to Look out for

Your retirement income depends on your age at when you retire, how the fund performs, charges deducted and future annuity rates.

4.1 Choose a pension fund with a sound track record of investment performance.

• There is no guarantee that a fund will continue to perform well. Take professional advice before committing to a fund.

4.2 Compare the pension plan's charges with the charges of other plans. High costs can reduce your pension significantly.

• Charges cover marketing and selling, administration and fund management. In some schemes, initial charges can mean that only 89p in every £1 of premiums is invested in your pension in the first five years.

4.3 Flexibility is important, as the future is not predictable.

• Can you suspend contributions, or reduce or increase premiums? Are there financial penalties for doing so?
• Can you transfer your pension, with little financial penalty, to a new scheme? The 'transfer value' of different plans with the same value can vary dramatically. Most modern schemes allow you to change contributions or transfer your fund without financial penalties.

4.4 People with irregular income may choose to pay single (lump sum) contributions, rather than regular contributions.

• This is to avoid paying penalties for stopping and starting contributions in longer-established schemes.

4.5 Interest rates when you retire will affect the pension you receive. Annuity rates are determined by long-term interest rates.

• If long-term interest rates are high when you retire, you will get a good pension.
• If long-term interest rates are low, your pension will be relatively poor.
• You can delay buying an annuity indefinitely and instead take 'income withdrawal'. This lets you preserve your capital and take cash directly from your pension fund. But you should make sure you understand the risks of taking this choice. Get professional advice before you commit.
• If your income at the time you retire will be sufficient, you can choose to buy a smaller immediate pension, which protects against the effects of inflation.