Cheaper route to a personal pension

IN THEORY, more and more people should be buying personal pension plans as they become increasingly aware that the state will not provide anything approaching a decent standard of living when they retire. Yet fewer people are doing so.

New rules that came into force this year, requiring the disclosure of sales commissions and policy charges, have inevitably put people off. Disclosure of the cash value of costs and commissions has revealed some expensive products. And the mis-selling scandal, which may mean traditional life insurance and pensions companies having to pay compensation running into billions of pounds, can only have increased suspicions.

Only a few pension companies have responded by cutting charges and significantly changing sales methods. The rest have stuck to the high-profit, high-cost route of paying fat commission, based on sales success and dependent on contributions being maintained unchanged for many years. This has made pension contracts inflexible in the past.

In this environment, it is not surprising that investment trust managers have recognised an opportunity to enter the pension market. Already three management companies, Fleming, Foreign & Colonial and Dunedin, have launched pension plans for the self-employed, employees without company schemes, and employees who do have company pensions but want to top them up.

All three carry similar charging structures that will place them among the cheaper providers in the market. Thatmeans more of your money goes forward for investment and, hopefully, a greater resulting pension pot or "fund".

It is the combination of charges and investment growth that will dictate the size of your pension fund. Investors can feel reasonably confident about the performance of investment trusts. Over the 15-20 years necessary to save for an adequate pension, investment trusts have generally performed better than other types of investment funds used for pension plans.

Investment trust pensions are also relatively flexible. Typically, you can stop, decrease or re-start contributions at any time without penalty.

But there are potential drawbacks. Investment trusts are themselves shares, quoted on the Stock Exchange. Their prices fluctuate around that of their underlying assets - typically they trade at a discount to what is termed net asset value (NAV). This means that sometimes, in a falling market, the share price can fall faster than investments in life insurance companies or unit trusts. The discount to NAV widens. On the other hand, in a rising market, investment trust share prices can perform better, as the discount narrows or trusts go to a premium to NAV.

Over the long term, investment trusts should still compare well with other types of investment as a pension-fund vehicle. But to protect yourself from the risk of rapidly falling markets as you are about to retire, you should consider gradually switching your fund to cash or other low- risk investments in the last few years before retirement.

At present, investment trust pensions do not offer premium insurance or tax-free life cover. These features will undoubtedly be added in the near future.

o Daniel Godfrey is marketing director of Fleming Investment Trust Management.