Do unit trusts beat pension plans?

A cheap, flexible, unit-based fund, with state support, may be the best option
Personal pension plans are just not popular enough to meet the escalating need for private pensions to replace the state Serps and traditional company pension schemes, according to Philip Warland, director-general of the Association of Unit Trusts and Investment Funds. Moreover, long- term care plans, he says, are too specialised, and the Government would do better to encourage investors looking for a cheap and proven investment vehicle to put their money into unit trusts.

Warland is cashing in on the recent claim by a Labour Party spokesman that personal pension plans can swallow up to 25 per cent of the money invested in charges and commissions and, above all, in marketing costs - which can account for up to 70 per cent of all charges. What he wants instead is government support for a new, simple, cheap, flexible, transferable, unit-based pension pot, with tax relief at the standard rate only on contributions up to a fixed level, and providing income to be taxed at the standard rate only on retirement.

There is no doubt that the current situation is unsatisfactory, but investors are already worried enough without more uncertainty and doubt. The fact is, unit trusts are not cost-free either, because investors traditionally lose around 5 per cent of their initial investment, which is taken to pay charges and commission to the salesmen and intermediaries who recommended the product.

Only recently have some providers started offering units (mostly in bread and butter trusts) with no initial charges. Unit-trust managers are also able to deduct an annual management fee of up to 1.5 per cent a year.

Investors can put up to pounds 9,000 a year into personal equity plans (PEPs) and receive the dividend income and any capital gains tax-free. This is attractive to top-rate taxpayers. But basic-rate tax-payers need a high income just to pay the management fees, and capital gains cannot be guaranteed except perhaps in the long term.

PEPs also have to be purchased out of income which has already been taxed. Contributions to personal pension plans, by contrast, attract tax relief which means even a standard-rate taxpayer can invest 100p (less charges) for just 76p in contributions and a top-rate tax payer can invest 100p on the same basis for just 60p, with the tax man paying the balance.