Fund managers have ideas for your savings. Just add a pensions wrapper

New providers

Anyone looking for a personal pension has traditionally had to turn to a life insurance company. But in the last year or so, a handful of City investment managers has also made a bid for your retirement savings.

The new providers' main claim is that they can manage your money much more cheaply than the life insurers. They have simply added a "pensions wrapper" to add the usual pension tax advantages to their existing investment trusts or unit trusts. These are collective funds that diversify risk by spreading investors' money across a broad range of shares.

The potential savings look impressive. Flemings, for example, says an investor saving pounds 200 a month for 10 years will end up more than pounds 3,500 better off than if he chose a personal pension from Legal & General, assuming the same investment returns. The same Flemings investment trust pension is also at least pounds 1,400 cheaper than pensions from Clerical Medical, Scottish Equitable, Norwich Union and Standard Life - all leading companies.

Daniel Godfrey, marketing director of Fleming Investment Trust Management, said the new pension accounts have attracted hundreds of customers since their October launch. Foreign & Colonial, manager of Britain's biggest and best-known investment trust, has also had a good response to its investment trust pension, introduced last year.

Investors seem to have found unit trust pensions much less attractive - probably because of the 5 per cent initial charge made on investments into unit trusts. Although this charge seems high compared with investment trust pensions, it leaves the management company with very little to offer in the way of commission to financial advisers. Insurers have rightly been criticised for their upfront charges, but some of that money is paid to the financial adviser or salesman for explaining the issues.

Framlington introduced its unit trust pension a year ago. Anne McMeehan, marketing director of Framlington, says: "I happen to think that the Framlington pension plan is an extraordinarily good one. But just because it's good does not mean it's persuading millions of people to get one."

Pensions are a complicated area, and few investors are capable or confident enough to decide what they need without the help of advice.

Charles Levett-Scrivener of Towry Law, a large firm of financial advisers, says the lower commissions paid on investment and unit trust pensions "is not nearly enough to reward anybody giving advice on these products". Interested investors unsure of what they want may therefore have to pay for advice - thereby reducing or eliminating the claimed cost advantage.

Flemings and Foreign & Colonial allow you to invest your pension in one or more of their investment trusts. The exact level of charges you pay will depend on your selection. The more esoteric trusts tend to have much higher levels of management expenses than the general or UK-only trusts.

The flattering cost comparisons are based on an assumed investment trust management fee - a modest 0.5 per cent in Flemings' case. The trusts you select may be more expensive.

David Graham, head of marketing at Scottish Widows, doubts that investment managers can claim any lasting cost advantage over life insurers, who have the benefit of large volumes of business. "We also have the expertise, the systems and the experience to handle the changes in legislation," he adds.

Mr Levett-Scrivener is also concerned that investment trust pensions do not offer the life insurance benefits that are important features of insured pension plans. He thinks the lack of "waiver of premium" benefit is particularly important. This ensures that premiums will continue to be paid into your pension should you become too ill to work.

Investors must always be wary of claims based on past performance, because there is no guarantee that good results will continue into the future. Be particularly careful about comparing investment and unit trust returns with an insurer's managed pension fund. Managed funds typically invest some money in fixed-interest securities and commercial property, not just in shares.

Mr Godfrey concedes that investment trust discounts may worry some investors. Shares in investment trusts typically trade for less than the value of their underlying investments and this gap - the discount - can either narrow or widen.

But the new products are not for everybody, and their drawbacks need to be properly considered before you make an investment.

Their dependence on share performance makes them potentially much more volatile than traditional insured pension plans.