Make sure you know what they do with your cash

Choosing a personal pension to meet your needs can seem a daunting task. But, as

One key question is, how flexible is the plan? None of us knows what the future holds or what our earnings will be in the long term, so a pension that allows contributions to increase and decrease at short notice and without charge is a plus.

All plans have a minimum contribution requirement. In some cases, this may be as little as pounds 25 a month, or pounds 100 for a single contribution, but some demand pounds 75-pounds 100 a month, or pounds 500-pounds 1,000 as a lump sum. Sign up to a plan with a minimum that you are likely to be able to afford even if you fall on hard times.

If you find yourself really strapped for cash, you may have to stop your contributions for a while. With most plans this can lead to it becoming "paid up", and you may not be able to start contributing again when your circumstances improve.

But the best schemes now allow payment holidays, typically of six months at a time. Some even allow payment to be suspended indefinitely. Anybody with especially erratic earnings may want to seek these out, or at least ensure that the provider is happy for them to pay one-off contributions rather than setting off on a treadmill of regular monthly payments.

Ask what a plan is invested in. Life insurance company with-profit funds offer steady if not very exciting investment growth. More adventurous are unit-linked funds which are more volatile than with-profit funds but offer a greater range of investment choices, including funds invested in emerging markets such as the Far East or Latin America. Fund management groups also offer unit trust and investment-trust-based plans, which tend to have lower charges. The choice of funds is wide, and can suit different appetites for risk.

Performance and charges require close examination - between them they will determine your pension's value on retirement. Most plans include an annual management charge for the underlying investment funds, an administration charge, and a policy fee for any insurance taken out.

Commission is paid to the independent financial adviser or salesman who sells the plan. Intermediaries typically receive commission of 3 per cent on each contribution made, and perhaps 0.5 per cent renewal commission.

It is vital to find out how commission is deducted. Some pension providers deduct it evenly throughout the term of the policy, but others take all the commission for current and future contributions at the beginning. In the latter case, this can mean that little of the early years' contributions are invested. So if you decide to stop payments, or transfer to another plan, you may be shocked to see just how little your pension pot is worth.

Pension plan providers argue that deducting commission upfront has little adverse impact, provided the plan is kept going for the whole term. But anyone fearful they may have to stop and start contributions should look for a level-cost plan or, better still, one that treats each contribution as a single premium, deducting charges only as and when payments are made into the scheme.

Direct providers, which do not sell through an intermediary, make a virtue out of offering plans with low management charges and no up-front costs or commission. For example, Virgin Direct's unit-trust-based plan has no initial charges for setting up the pension, an annual management fee of 0.75-1 per cent and a pounds 2 monthly administration charge. Only investment trust management groups such as Flemings, with their low management charges, can compete with this low level of fees.

But low charges are worthwhile only if supported by good performance. Performance returns for life company funds can be found in specialist magazines such as Money Management. Unit trust and investment trust performance can be seen each week in The Independent.

Money Management also carries out an annual survey of personal pension performance, looking at returns on both regular premium and single premium plans, taking account of charges. This year's survey highlighted as its best buys: Equitable Life, Friends Provident and Gartmore. It also included quite a few direct, telephone-based providers, including Colonial Mutual Direct, Scottish Widows Direct and Eagle Star Direct - a result, says Money Management, of their low charges.

Personal pensions can come with a range of bells and whistles. These include waiver-of-premium insurance to meet your contributions if you are unable to work, life assurance, especially as contributions will get tax relief, and the ability to divert your National Insurance Contributions into the plan.

Check, too, that the provider is happy for you to retire earlier than your stated retirement date. Some life company plans are segmented so that plan benefits can be taken in stages, which is handy if you intend to retire gradually.

Juliet Oxborrow is editor of `Personal Finance'.