Are you paying into a lame pension?

There aren't many things from the past most of us at MoneyWeek really hanker after. But we all really wish we had final-salary pensions. Back then, all employees had to do to get a good pension was to hang on to their jobs, and hope their employer didn't go bust before they died.

Today, nothing is so simple. You might still get a company pension (and soon, via the new auto-enrollment system, you probably will). But, as Josephine Cumbo points out in the Financial Times, you will have to contribute to it, then bear all the risk of both its investment performance and its later transformation into a long-term income.

The problem is that very often you will have no control over the pension scheme the money goes into. And it could be going into a bad one. The Office of Fair Trading recently identified about £40bn-worth of pension savings it considers at risk of not growing as they should, due to being "held in company pensions that are poorly governed or that levy high charges".

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So how do you know if your money is in that £40bn? Firstly, have you been paying in since before 2001? Back then charges were effectively capped at 1.5%, falling to 1% via the stakeholder pension system. Any pension taken out beforethat might be paying much more. You might also be paying extra in what the industry calls "deferred member charges" if you have a pension you are no longer paying into (perhaps you have moved jobs).

This matters. Pay today's standard pension charge of around 0.52%, and on FT numbers a 40-year-old starting today with £50,000 in savings could end up with £70,000 more in retirement than if you pay an old-fashioned (and outrageous) 1.5%. The very worst schemes, says The Mail on Sunday, charge up to 2.3%.

But charges aren't the only problem: many of the default funds for our pensions aren't up to the job in performance terms either. So what do you do?

The answer isn't simple. Having a bad pension fund isn't always a reason to move on. That's because some corporate pension schemes offer benefits that can make hanging on worthwhile, says Cumbo. Think guaranteed annuity rates, guaranteed rates of return and pre-retirement loyalty bonuses. The nearer you are to retirement, the more these could be worth. That means this is one of those occasions where you really do need to take professional advice.

One day we hope that choosing a pension will be as simple and transparent in terms of both price and performance potential as buying a car. Auto-enrolment may have started some discussion around this subject, but take a look at the insane complications inherent in the industry and that day still seems to be a long way off.