Personal Finance: Get to know each other before getting hitched

The success of any relationship with a pension provider is in the detail. Beware the small print, in which big charges can lurk.

By now everyone must know about the need to make adequate pension provision. Anyone offered membership of an occupational scheme is likely to be better off taking up the offer.

But for the self-employed and those in unpensioned employment, a personal pension is the only option. These carry generous tax breaks, but care is needed in matching a plan to your circumstances.

"The first real issue is the structure of the contract," warns Gillian Cook, a senior pension consultant with the actuaries Bacon & Woodrow. "It is easy to miss the detail of this if your eye is caught by a glossy brochure or big claims about past fund performance."

Finding a contract with conditions that fit your likely career pattern and earnings is vital. "Fewer and fewer of us stay with one employer, and many more white-collar workers now opt for self-employment," says Ms Cook. "Also, real earnings can peak far earlier, then decrease long before retirement."

So it is important to find a contract flexible enough to let you vary and suspend contributions without being penalised. The penalties in question nearly always result from the basis on which your adviser or pension provider is remunerated for any advice they give you when you choose a plan.

"Start by deciding whether you are going to pay commission or fee for advice, or whether you are "going it alone" and opting for a "low cost" plan where no advice is offered and no corresponding charges made," says Ms Cook.

Some type of commission basis is still most common, which makes an understanding of the complex and opaque system of commission-related charges very important.

Most providers offer "unitised" funds with a "bid-to-offer spread" typically of 5 per cent. The bid price is that at which you buy funds, the offer price that at which you redeem them. Typically, for every pounds 100, the spread will reduce the real value of your holding to pounds 95.

Next you can expect a monthly "policy fee" of between pounds 2.50 and pounds 4.50,which is a fixed charge made by the provider for administering the policy. This is deductible from your premium before it is invested.

Remember, these charges are not directly related to the amount you invest. "Why have two pounds 20-a-month plans each charging pounds 3 per month, or a total of pounds 6, if you could have one pounds 40-a-month plan charging pounds 2.50?" asks Ms Cook. "It is easy to forget that these fixed costs cut the final value of your fund."

Next is an annual charge for running the pension fund of between 0.5 and 1.5 per cent of the fund value. You will not notice these charges; they are deducted before you receive a statement of fund performance.

And then there's the "allocation rate", which affects both the actual amount of your premium invested and when during the policy term this happens. Care is needed; do not confuse allocation rates with bid-to-offer spreads. The two are independent of each other.

Take an example. You may be offered a plan with a regular allocation rate of 95 per cent and a bid-to-offer spread of 5 per cent. What this actually means is that only 90 per cent of your premium is finally invested into your fund of choice.

But you may be offered an "enhanced" allocation rate of 105 per cent, with a bid-to-offer spread of 6 per cent. In this case 99 per cent of your premium will be invested.

Some providers also make a distinction between so-called "capital" and "income" pension fund units. The distinction is important if you stop contributions early or wish to transfer your plan.

Capital units carry in-built penalties designed to meet the cost of any commission due to an intermediary regardless of whether you continue the plan. For instance, Barclays Life sells a plan with a bid-to-offer spread of 5 per cent, a 1 per cent management charge and a capital levy of 6 per cent over its first 12 months. Therefore net premiums actually invested for the first year of the plan could be reduced by approximately 12 per cent of their value.

You have the right to transfer any fund value you have built up between providers but should take qualified advice before doing so. "It is easy to be confused by the complexity of charging structures and lose as much as you gain," warns Ms Cook. "Ask for a clear statement of the costs and their impact on estimated fund growth."

One way to minimise these costs is by opting for a plan which pays commission on a level rather than a front-loaded basis, spreading the amount deducted from premiums for commission payments over the policy term rather than, as is the case with front-loaded plans, over the first 12 months.

Finally Ms Cook warns: "Recent changes to the treatment of advanced corporation tax mean that pension fund growth will be reduced by between 0.2 and 0.25 per cent a year. If you have not yet increased your contributions to compensate for this change, then think about doing so now, by between 10 per cent and 15 per cent."