Fear of finance

Pension providers have a long way to go before they can convince the majority of investors that they are not being short-changed

Last year was another satisfactory one for most investors in shares and trusts, with the FTSE index of the top 100 shares recording a gross return of 16 per cent including dividends.

Many unit and investment trusts will have provided a decent return, especially those which invest mainly or wholly in North America, the Far East excluding Japan, and emerging markets.

But the investment industry can never rest on its laurels. Unit trusts on average traditionally underperform the FTSE index which is why tracker funds which follow the index have proved so attractive, combining guaranteed average performance with low overheads.

UK pension funds have also underperformed the index, with an average gross return of only 11 per cent last year.

This is mainly due to the strength of sterling which reduced the value of investments abroad, a cautious approach to US and UK shares, which led many pension funds to be under-invested in both markets and the lower returns on cash, bonds and property holdings. But pension providers also have a long way to go before they convince investors that they are not being short-changed by small print and special conditions. Most people paying into a personal pension plan or a company plan based on defined contributions now appreciate that the eventual pension they will receive depends entirely on how well the funds are invested, and that all projections depend on assumptions, cautious, average or optimistic, which are unpredictable.

Pension fund managers now have to give a clear statement of the initial charges they deduct to pay commissions before any of the balance is invested. They also have to declare the regular management fees which they charge.

But the bulk of investors still feel that they are locked into a long- term investment with the fund they first choose, and that they cannot trust fund managers to treat them fairly if they want to switch investments.

Some investors know that when they retire they do not have to buy an immediate annuity, fixed for the rest of their lives from the company which managed their pension. They can now buy their annuity from the company which offers the highest current rate.

They also know that instead of buying an annuity they can reinvest their pension fund proceeds and take income at least until they reach the age of 75. There is, however, a widespread suspicion that some insurance companies, levy an arbitrary charge on the adjusted value of the funds they release, over which the investor has no control and which does not appear on the list of published charges.

Few know that deferring their annuity and opting for income drawdown will also cost them around 5 per cent of their fund in transfer charges.

There are too many other cases of investments where between the illusion and the reality the shadow falls.

With-profits bonds are a traditional investment for investors who want professional management, and risks spread over a range of sectors and years to give a smoother ride than unit trusts or investment trusts for example, which rise and fall with stock markets.

Bonuses once awarded cannot be lost again and current headline bonus rates of almost 10 per cent look quite attractive.

Norwich Union is currently advertising a gross bonus rate of 10.5 per cent, Scottish Mutual 10 per cent and Commercial Union 9 per cent.

But Kevin Mills, a partner at independent financial advisers Holden Meehan, points out that bonus rates are not always what they claim.

These three companies charge a monthly policy fee which reduces the gross bonus rate by almost 1 per cent for between five and seven years, and it is the net return which matters to investors. Ask Holden Meehan (0117- 925-2874) for a free comparison fact sheet.

We have to mention guaranteed High Income bonds which also claim to return investors' capital provided one or more of the leading stock market indices, usually the FTSE100 or the Dow Jones, do not fall over a five-year period.

Most stress that both indices have have shown some growth over any five- year period since 1984. But the Institute of Actuaries has just pointed out that the UK market fell over each of the five-year periods which ended in 1974 to 1978.

Since 1974 there has been a 23 per cent chance of one or other market falling over five years.