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

Independent Partners: 10 top tips for retirement. Get your free guide here

Arts and Entertainment
Gregg Wallace in Summer's Supermarket Secrets
tv All of this year's 15 contestants have now been named
Arts and Entertainment
Inside the gallery at Frederick Bremer School in Walthamstow
tvSimon Usborne goes behind-the-scenes to watch the latest series
Life and Style
A picture taken on January 12, 2011 shows sex shops at the Paris district of Pigalle.
newsThe industry's trade body issued the moratorium on Friday
News
Winchester College Football (universally known as Winkies) is designed to make athletic skill all but irrelevant
Life...arcane public school games explained
PROMOTED VIDEO
Arts and Entertainment
Could we see Iain back in the Bake Off tent next week?
tv Contestant teased Newsnight viewers on potential reappearance
Life and Style
Silvia says of her famous creation: 'I never stopped wearing it. Because I like to wear things when they are off the radar'
fashionThe fashion house celebrated fifteen years of the punchy pouch with a weighty tome
News
i100(and it's got nothing to do with the Great British Bake Off)
News
Angelina Jolie with her father Jon Voight
peopleAsked whether he was upset not to be invited, he responded by saying he was busy with the Emmy Awards
News
Bill Kerr has died aged 92
peopleBill Kerr appeared in Hancock’s Half Hour and later worked alongside Spike Milligan and Peter Sellers
News
news It's not just the world that's a mess at the moment...
Sport
footballPremiership preview: All the talking points ahead of this weekend's matches
News
Keira Knightley poses topless for a special September The Photographer's issue of Interview Magazine, out now
people
Voices
The Ukip leader has consistently refused to be drawn on where he would mount an attempt to secure a parliamentary seat
voicesNigel Farage: Those who predicted we would lose momentum heading into the 2015 election are going to have to think again
Arts and Entertainment
Cara Delevingne made her acting debut in Anna Karenina in 2012
film Cara Delevingne 'in talks' to star in Zoolander sequel
News
i100
Sport
Mario Balotelli pictured in his Liverpool shirt for the first time
football
Life and Style
tech
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Data Scientist (SQL,Data mining, data modelling, PHD, AI)

    £50000 - £80000 per annum + benefits+bonus+package: Harrington Starr: Data Sci...

    SAS Business Analyst - Credit Risk - Retail Banking

    £450 - £500 per day: Orgtel: SAS Business Analyst, London, Banking, Credit Ris...

    Project Manager - Pensions

    £32000 - £38000 Per Annum Bonus, Life Insurance + Other Benefits: Clearwater P...

    KYC Analyst, Birmingham - £200-£250 p/d

    £200 - £250 per day + competitive: Orgtel: KYC Analyst, Key Banking Client, Bi...

    Day In a Page

    Ukraine crisis: The phoney war is over as Russian troops and armour pour across the border

    The phoney war is over

    Russian troops and armour pour into Ukraine
    Potatoes could be off the menu as crop pests threaten UK

    Potatoes could be off the menu as crop pests threaten UK

    The world’s entire food system is under attack - and Britain is most at risk, according to a new study
    Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

    Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

    Seoul's plastic surgery industry is booming thanks to the popularity of the K-Pop look
    From Mozart to Orson Welles: Creative geniuses who peaked too soon

    Creative geniuses who peaked too soon

    After the death of Sandy Wilson, 90, who wrote his only hit musical in his twenties, John Walsh wonders what it's like to peak too soon and go on to live a life more ordinary
    Caught in the crossfire of a cyber Cold War

    Caught in the crossfire of a cyber Cold War

    Fears are mounting that Vladimir Putin has instructed hackers to target banks like JP Morgan
    Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years

    Salomé: A head for seduction

    Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years. Now audiences can meet the Biblical femme fatale in two new stage and screen projects
    From Bram Stoker to Stanley Kubrick, the British Library's latest exhibition celebrates all things Gothic

    British Library celebrates all things Gothic

    Forthcoming exhibition Terror and Wonder: The Gothic Imagination will be the UK's largest ever celebration of Gothic literature
    The Hard Rock Café's owners are embroiled in a bitter legal dispute - but is the restaurant chain worth fighting for?

    Is the Hard Rock Café worth fighting for?

    The restaurant chain's owners are currently embroiled in a bitter legal dispute
    Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival

    In search of Caribbean soul food

    Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival
    11 best face powders

    11 best face powders

    Sweep away shiny skin with our pick of the best pressed and loose powder bases
    England vs Norway: Roy Hodgson's hands tied by exploding top flight

    Roy Hodgson's hands tied by exploding top flight

    Lack of Englishmen at leading Premier League clubs leaves manager hamstrung
    Angel Di Maria and Cristiano Ronaldo: A tale of two Manchester United No 7s

    Di Maria and Ronaldo: A tale of two Manchester United No 7s

    They both inherited the iconic shirt at Old Trafford, but the £59.7m new boy is joining a club in a very different state
    Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

    Robert Fisk: No victory for Israel despite weeks of devastation

    Palestinians have won: they are still in Gaza, and Hamas is still there
    Mary Beard writes character reference for Twitter troll who called her a 'slut'

    Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

    The Cambridge University classicist even wrote the student a character reference
    America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

    America’s new apartheid

    Prosperous white districts are choosing to break away from black cities and go it alone