Any working person can take out a personal pension - as long as they’re not already a member of an occupational scheme (i.e. as long as you don’t have a pension provided by your employer). And because a personal pension is not tied to any employer, it can be kept running even if you move from job to job.

Personal pensions are now available from banks, insurance companies, investment houses and some retailers – all of whom will happily quote you figures for a policy, usually free of charge. It is wise to shop around. An independent financial advisor can suggest a suitable pension provider, as can the Financial Services Authority website (www.fsa.gov.uk/tables).

For all contributions you make to a personal pension, the Government will grant tax relief; if you pay a basic rate of tax, you will effectively pay £78 to see £100 paid into your pension. If you’re a higher-rate taxpayer, it will effectively cost just £60 to see £100 go into a fund.

On retirement, you will be entitled to take up to 25% of the value of the pension as a tax-free lump sum, and the remainder is paid in instalments. The flexibility of personal pensions means that they can be tailored to allow you to retire any time between the ages of 50 and 75, but obviously the sooner you aim to retire, the more you will have to pay in to ensure that you have a reasonable return.

Investing

The money you pay into a scheme (your contributions) will be invested by your provider, in order to earn interest.

There are three main types of investments:

Equities, which are linked to the stock market and therefore carry the risk of the market falling; Bonds (or gilts) - basically loan agreements where the issuer (usually Governments or very large companies) promises to repay the investor’s capital plus interest at a particular date in the future; Deposits – generally bank accounts with very little risk and modest returns.

In order to establish a healthy fund without entailing large risk, it is wise to ensure your pension provider spends your money across a range of investments. That way if once investment performs badly, you may have another that is performing particularly well.

Value

The final value of a personal pension depends on the size of the contributions you make. This can be anything up to 40% of your earnings, with your age dictating the maximum percentage allowed. And of course it relies on the sort of investments made, how well they perform, and the ‘annuity rate’ at the date of retirement.

The ‘annuity rate’ is the rate offered by the insurance company from which you buy an annuity – the right to receive an annual payment of an allowance.

The company then becomes responsible for paying your pension instalments to you. Current rates are around the 7% mark, having reached a high in the late 1970s of 18%.

Annuities

Inland Revenue rules mean you must buy an annuity as part of your pension plan. But you do not have to purchase it from the insurance company with which you have been saving. You are entitled to search the marketplace for the best possible pension by taking advantage of an Open Market Option. Your insurance company is obliged to spell out that its competitors may offer more attractive annuity rates. A poor rate can wipe several per cent from your annual pension income.

Even though you must buy an annuity before you reach 75, you do not have to do so at the time as taking your lump sum. There are two options open to you, the first of which is ‘drawdown’ . With this choice you will draw a certain level of income (set by the Inland Revenue) from your pension fund while continuing to invest in the usual way. You can choose to buy an annuity with part of the fund, while drawing an income from the remainder. Phased retirement is the other option. It allows you to retire in stages by dividing your fund into segments, each one continuing to be invested as usual. You can choose to encash each segment whenever you choose (before the age of 75). Each time a section is cashed, you will be able to take a lump sum and/or an annuity.

If you have more than one pension pot, it may be worth considering aggregating them into a single one. Larger funds tend to attract higher rates and the most competitive annuities tend to have a minimum purchase price. However, aggregating your pots does raise your exposure to risk, because you are placing your faith in a single pension provider. Smaller pension pots can sometimes be taken as cash without the need to take out an annuity in the first place. This applies when the aggregate of total benefits payable to you under all pension schemes (providing benefits in respect of employment) doesn’t exceed £260 per annum.

Other options

You have a number of other choices with regard to your personal pension. You can opt to buy one that ceases when you die, or one that also provides an income to a surviving dependent. There will also be the option to buy either a non-increasing pension, or one that increases each year, so its real value does not decrease. Finally, you must decide whether you want to purchase a guarantee that will pay the balance of unpaid instalments to a dependent if you die within a certain number of years.