Invest wisely when your future is at stake

With the spotlight on pension plan charges, The Independent takes a look at investment trust pensions

The advent of stakeholder pensions (see page 2) has thrown pension plan charges into the spotlight. The Government's blueprint for good-value personal pensions describes a product where not more than 1 per cent of the fund is swallowed by the provider in fees.

The advent of stakeholder pensions (see page 2) has thrown pension plan charges into the spotlight. The Government's blueprint for good-value personal pensions describes a product where not more than 1 per cent of the fund is swallowed by the provider in fees.

But investment trust pensions - a relatively new breed of pension - already have some of the lowest charges around. And because many of the investment trusts they invest in are now trading at prices way below the actual value of their assets, prospects for long-term growth may be better than they are for many other forms of pension investment.

There are only a handful of providers offering investment trust pensions. Among them are Foreign & Colonial, Edinburgh Fund Managers and Fleming Investment Trust Management. The plans carry the same tax breaks as other personal pensions but invest exclusively in investment trusts.

Investment trusts, like unit trusts and open-ended investment companies (OEICs), are collective investments which individuals can buy a share of. Although they are an older type of investment vehicle, investment trusts have long been in the shadow of unit trusts. Why?

Critics say investment trusts are harder to understand. It is easy to see how unit trusts are priced - you basically divide the trust's total assets by the number of units issued to get the unit price. But the picture is murkier for investment trusts. They issue shares which tend to trade at a discount or a premium to the net asset value of the trust, depending on market conditions.

Investment trusts are allowed to borrow money to invest, while unit trusts cannot. This means they can invest more and potentially make higher returns, but they also stand to suffer exaggerated losses. Because of this, investment trust shares can be more volatile than unit trust units.

But, particularly over the long term, investment trusts have real advantages, advocates say. "There's a lot of bad publicity surrounding investment trusts which tends to be very short-termist, and which overlooks the long-term benefits," says Roddy Kohn of independent financial advisers Kohn Cougar, based in Bristol.

Many good investment trusts are trading at a discount to their net asset value, he says. The Foreign & Colonial Investment Trust is now at a 16 per cent discount, while Edinburgh's Worldwide investment trust stands at a 22 per cent discount. Over time, this discount seems likely to narrow, boosting returns for the investor.

Not only are the prospects for investment growth seen as good, but investment trust pensions have low charges too.

Many providers of traditional personal pension plans have cut their charges and fees in the last nine months in anticipation of stakeholder pensions, which are due to be introduced next April. But some plans are still very expensive, making an annual management charge of up to 1.25 per cent of the fund's value, and levying a policy fee on every new contribution.

Investment trust pensions carry no policy fee and have lower annual charges. And investment trust pensions frommost of the major providers have no bid/offer spread.

At the moment, the guidelines are that stakeholder pensions should have 100 per cent allocation - which means all of your contribution goes to your pension pot - £20 per month minimum regular premium and an annual management charge of just one per cent.

Edinburgh Fund Managers and Foreign & Colonial currently come close to these requirements, and Flemings says it is still looking into whether its investment trust pension can be altered to comply with stakeholder pensions guidelines.

For traditional pensions, the allocation rate can be well below 100 per cent, while nearly all investment trust pensions have full allocation.

Investment trust pensions can have a particular cost advantage for investors with large portfolios as the annual management charge is capped at £175, which would make the charge on a large portfolio low in percentage terms.

The Association of Investment Trust Companies says investment trust pensions offer far more flexibility than old-style pensions. Planholders can take contribution holidays, vary their contributions and transferring out is far less onerous.

But although investment trust pensions meet stakeholder guidelines on cost, providers have trouble with the requirement that the new schemes allow a minimum contribution of just £20, says Ian Sayers, technical director of the AITC. "At £20 a month, you're looking at £240 a year, which gives £2.40 in charges - that's not a lot for two statements a year plus dealing with queries."

Most investment trust pensions give planholders a choice of one or more individual investment trusts to include in their portfolio. Some, including Flemings and Foreign & Colonial, will only let you choose from a range of trusts under their own management, whereas others, notably Alliance Trust Savings, which is a Self-Invested Personal Pension, gives you a choice from a much wider range.

Edinburgh Fund Managers offers an investment trust pension which is halfway between these two. The contract lets you choose from a range of 14 of its own funds and 25 from other managers. But you can choose to leave the decisions to the professionals too.

"We also have a managed fund, where two-thirds goes into the Edinburgh Investment Trust and a third goes into the Edinburgh Worldwide Investment Trust," says Lesley Drummond, marketing manager at the fund management group.

Most financial advisers say as you approach retirement your pension fund should be switched into less volatile investments, to minimise the impact of any downturn in the stockmarket. Government bonds or other fixed interest investments are usually seen as the most suitable and stable investments in the later years.

But since investment trusts can only invest in shares, with an investment trust pension there is normally no fixed-interest option. One solution is simply to transfer the accumulated fund to another pension plan, and one of the advantages of investment trust pensions is that you can generally transfer out without penalty. But jumping ship is not the only way to play safe.

"People close to retirement should avoid the volatility of the stockmarket, but even in this case, they could look at zeros... or chose a low risk investment trust," says Mr Kohn. Most investment trust providers offer zero dividend preference shares, or zeros - a low-risk type of share issued by a split capital investment trust.

AITC publishes a free fact sheet on investment trust pensions, 020-7431 5222; Kohn Cougar, 0117 9466384