Is your pension in a duff scheme or a money-making machine?

To paint a realistic picture we factored in a normal range of employer contributions, typical fund options and charges to calculate the most and least efficient possible combinations within pension schemes. What we found was a shocking disparity between the abilities of the best and the worst schemes to grow the money.

Our modelling revealed that a worker who put £100 into the best pension scheme in 1998 would get a whopping £678 back if they retired today. But if invested in the worst pension scheme, that £100 would have grown to a grim £164* over the same period - less than a quarter of the amount the best pension produced.

*Hidden charges known to exist have not been taken into account due to lack of accurate information.

But exactly why have some schemes been failing to grow money while others have excelled? There are several factors that affect how your money grows (or fails to), and if you know what to look for, you can spot the signs you need to identify if your money is in a duff scheme or a money-making machine.

Employer contributions

The best thing about pensions is the free money your employer puts in for you. The single biggest boost (£200 out of the extra £514 it delivered) to the UK's best pension scheme came from a generous two-for-one employer contribution, which ramps the initial investment up to £300 before it has even started growing - a third more than the entire growth on the worst pension.

Will Aitken, senior consultant at Towers Watson, says: "Matching contributions from an employer is always good news. Someone getting a two-for-one match from their employer has probably quadrupled their money once we take tax relief into account. Good luck getting that kind of deal anywhere else."

But the employer running the UK's worst pension scheme didn't contribute anything. This makes it much less attractive, but the good news is that the law is slowly changing, so by 2017 it will be compulsory for all employers to offer you a pension into which they will put a minimum of 3 per cent of your salary - as long as you contribute the same amount.

Charges

Because pension schemes contain very large amounts of money and use economies of scale, the associated fees are normally much lower than what you'd pay as a private investor. Or at least that's the theory. But this does not mean they are all cheap - and it's worth noting that some (usually the big ones that can 'bulk buy' investments) are much cheaper than others. There is a long list of charges that eat into our pension money, but generally we only get told about three of them. These are the cost of:

■ Administering the pension plan.

■ Fund management.

■ Remunerating a professional adviser.

Administration and fund management costs normally come to between 0.3 per cent and 1.5 per cent of your fund for every year your money is in the scheme, although fees as high as 1.5 per cent are unusual. The professional adviser or consultancy fees are taken out for the first year, normally around 2 per cent, although the government is cracking down on this.

Mr. Aitken says that if your charges are more than 0.8 per cent a year you need to be asking why. And if your money is invested in passively managed funds, you shouldn't be paying any more than 0.6 per cent a year - and even less if your employer contributes to the scheme.

Hidden charges

Unfortunately there are many extra charges we don't get told about. These charges are very real and Aon Hewitt estimates that they can eat up to 1.25 per cent of your pension pot every year in the worst cases. But in the best cases they are virtually non-existent. Where they do apply, though, you never actually see them because they are taken account of when calculating the unit price of the fund they are invested in. The net effect is that the performance you receive on your investments is reduced to the tune of these charges.

So if you thought the return on the UK's worst pension scheme was bad, it's about to get worse. If the scheme has been slapping on an extra 1.25 per cent a year in hidden charges, instead of turning £100 into £164 in 15 years it would grow to just £132.95, at a measly rate of 1.95 per cent per annum over the period. You could have easily made twice as much by putting your money in the best cash Isa over the same period.

The following costs are specifically excluded by the financial watchdog, the Financial Conduct Authority's calculation methods for fund total expense ratios (TERs) and are commonly referred to as hidden costs:

■ Transaction costs (includes stamp duty, brokerage fees, market impact costs and performance fees within some fund-of-fund structures).

■ Interest on borrowing.

■ Payments incurred because of financial derivative instruments.

■ Entry and exit costs (eg commission or fees payable to advisers).

■ Soft commission.

■ Bid-offer spreads.

Some investments are better than others

When you hand your money over to a pension scheme it will be invested in the stock market on your behalf, but where it is invested makes a big difference to the lump sum you get back when you retire. Growth is important within pension schemes but because all the investment risk falls on you, the fund managers looking after your money choose to invest in very cautious default funds. This means the returns don't tend to be spectacular.

But the difference between the best and the worst performing default funds is huge and has a massive impact on the level of your retirement income. Alexandra Kitching, pensions quality mark manager at the National Association of Pension Funds, warns: "Many of the default funds out there are not up to scratch at all," although she insists work is being done to improve them.

Our modelling showed the UK's best performing pension scheme was invested in a 50:50 global equity portfolio (50 per cent FTSE All-Share, 17.5 per cent FTSE World North America Index, 17.5 FTSE World Europe ex UK Index, FTSE Japan Index, FTSE World Asia Pacific ex Japan Index), a typical default option for DC schemes according to Aon Hewitt. Before charges, it turned £100 into £236 over 15 years.

The worst performing fund returned £32 less than this, turning £100 into just £204 over the same period. It is a typical default fund into which millions of workers' money is funnelled every year and this one is also a lifestyle fund that flips your money from equities into bonds around 10 years before retirement.

The logic behind this so-called lifestyling is to protect the fund from the violent peaks and troughs of the stock market. But scepticism is growing about whether these funds actually work. Tom McPhail, head of pensions research at Hargreaves Lansdown, said: "You'd expect the lifestyle fund to underperform. It is increasingly uncertain that a lifestyle investment strategy is actually a good idea at all."

Turning a lump sum into retirement income

Even if your pension has been growing in a money-making machine, choosing the wrong annuity can undo all its hard work. Your annuity, which will turn your lump sum into guaranteed income for the rest of your life, unless you go into drawdown instead, will take the final bite out of your nest egg. Read more about drawdown

The value for money you get from annuities can vary wildly depending on the type of annuity you buy and how you buy it. There are two things you can do that have the potential to dramatically improve the annual income you get when you hand over your lump sum to an insurer.

The first is shopping around before accepting whatever deal your pension provider serves up on a plate. This is because there is a very high chance what you are offered in the first instance will not be the best value.

Malcolm Tarling, head of communications at the Association of British Insurers, said: "We urge people approaching retirement to shop around to get the best annuity deal for their circumstances. For example, someone in poor health might benefit from an enhanced annuity."

And as Mr Tarling points out, you may be able to get a higher income if you are ill or if you smoke. It is well worth applying for an enhanced annuity that takes many illnesses into account and factors this into your quote.

Internal Aon Hewitt data reveals the worst provider level annuity for someone retiring at 65 would only swap a lump sum of £678 for £34.44 a year, £2.75 less than the best deal from the open market (£37.09). And a smoker could get higher still, at £42.65 a year for exactly the same sum.