Take control of your own pension fund

The individual pension account promises flexibility

Most people find the new Stakeholder pension, to be launched in April 2001, daunting, but a new variant is threatening to confuse matters even further. The individual pension account (IPA), a concept floated by the Treasury and set to launch alongside Stakeholder, is targeted at those who want greater control over the investments they hold within their pension fund.

Most people find the new Stakeholder pension, to be launched in April 2001, daunting, but a new variant is threatening to confuse matters even further. The individual pension account (IPA), a concept floated by the Treasury and set to launch alongside Stakeholder, is targeted at those who want greater control over the investments they hold within their pension fund.

Details remain vague, but plans should give those saving for retirement the flexibility to invest in a range of unit trusts offered by specialist fund managers like Fidelity, Gartmore, Jupiter and Newton, rather than being restricted to the life funds of insurance companies.

This seems an attractive idea. Major fund managers have generally provided better returns than life and pension companies. Top-performing, high-profile funds such as Aberdeen Technology, Invesco GT European Growth and Newton Income should prove appealing.

But many pension experts are less than impressed by the workings of the IPA in practice. The Treasury has been slow to release full details and critics claim the scheme is likely to be complex and contradict two key elements of Stakeholder - simplicity and low charges. They argue that schemes allowing more savvy investors to take control of their pension portfolio are already available.

Jon Briggs, associate director of Chartwell Investment Management, says the IPA will work as a pensions "wrapper", inside which savers can hold investments such as unit trusts, open-ended investment companies (OEICs), investment trusts and gilts, and switch between them to boost returns. The IPA wrapper will allow savers to claim tax relief at their marginal rate on their personal pension contributions.

His first concern is that launching another new scheme alongside Stakeholder will baffle investors: "The IPA will add another layer of confusion for people who are already confused by Stakeholder."

He says the IPA is likely to work as an add-on to a pension fund from an existing life and pensions company and the drawback is two sets of charges - one from the existing company, another from the fund managers managing the invest-ments within the IPA wrapper.

"Stakeholder pensions may only have a maximum annual management charge of 1 per cent. I can't see how, with two sets of charges, IPAs can hope to stay within that," says Mr Briggs, who argues this makes IPAs no better than current schemes that allow investors to sink money into funds by a range of different managers, such as the self-invested personal pension (SIPP).

Generally used by more sophisticated investors, SIPPs can be used to hold unit trusts, investment trusts, insurance company funds, gilts, property and stocks and shares, and allow switching between these different vehicles. SIPPs are offered by around 20 companies including Legal & General, Sun Life and Winterthur Life. You probably need more than £25,000 in your fund to make the plan worthwhile, or to pay in at least £200 a month, as charges can be high, although, says Mr Briggs, costs are "becoming less and less all the time".

Another popular alternative is the Skandia Life multi-manager pension, which allows savers to choose from 220 funds from 20 different managers, including Aberdeen, Fidelity, Fleming, Framlington, Henderson, Invesco and Newton. But it is not cheap, charging a 5 per cent bid/offer spread on money invested, plus a 0.755 annual management charge and a £2 monthly policy fee. A further annual management charge varies according to the fund chosen. The charge is 1 per cent for Aberdeen Technology, 1.25 per cent for Framlington Health and 1.2 per cent for Invesco European Growth.

Adam Norris, managing director of Hargreaves Lansdown Pensions, says a growing number of pension companies, including Friends Provident, Legal & General, Norwich Union, Scottish Amicable, Scottish Widows and Standard Life, are setting up schemes that give a choice of external funds. Unlike Skandia, most of these will offer a single managed fund from each manager rather than the full choice. But they should be cheaper.

Scottish Widows, for example, offers managed funds from Fidelity, Fleming, Gartmore, Mercury, Newton, Perpetual and Schroder. It charges an annual management fee of 0.725 per cent, with external fund managers' charges on top. These range from an additional 0.55 per cent on the Schroder managed fund, to 1.1 per cent on the Fidelity managed fund.

Pension plans using external managers are almost inevitably going to cost more as there are two companies looking to make money from charges on your pension fund. But Mr Norris says higher charges are worth paying if, as he believes will happen, external fund managers deliver the goods. "You may have to pay an extra 0.5 per cent each year to have, say, Fidelity funds, but this is worth it if they perform better. Skandia, for example, is selling very well even though it is more expensive, because people like external fund managers."

Tom McPhail, pensions development manager at Torquil Clark, says although the IPA scheme has its flaws, it could still prove a success in the longer run because it answers a growing demand to buy pensions from the best possible investment house. "Investors are getting more sophisticated. They have come a long way in the last 15 years," he says.

Some investment experts are jaundiced by the constant change in the pensions world. Andrew Merricks, partner at financial advisers Simpsons of Brighton, says he prefers to look elsewhere for his clients' retirement planning. Inflexible and expensive plans, mis-selling scandals and current low annuity rates have all pushed him towards investment vehicles such as ISAs: "I am finding pensions very difficult to justify. ISAs are similarly tax-efficient, and you can switch fund managers easily and access your money at any time."