The plain facts on pensions vehicles

The smart money is in trusts, but they are not as popular as they should be. Tony Lyons spells out the advantages

The long-term advantages of linking a personal pension to investment trusts rather than other forms of unitised funds have been apparent for some time to the more sophisticated investor. But the seemingly hard-to- understand structure of investment trusts has meant that their popularity as pensions vehicles has hitherto been limited.

The plain facts are that over the long term, investment trusts have out- performed more popular unit trusts and other unitised funds. This is because they offer a number of significant advantages over other forms of collective investments.

Investment trust charges, at between 0.25 and 0.75 per cent, are lower than their unit trust competitors, which levy an annual management fee of between 1 and 1.5 per cent. The spread between the buying and selling prices is lower; it is determined solely by supply and demand in the stock market. Unlike their rivals, trusts can borrow money for investing when they feel that it is advantageous.

Also, they often stand at a discount to net asset value, so the investor benefits from purchasing a basket of shares in many different companies at a price proportionately lower than if they were to be bought directly. When trusts' shares are in demand, investors benefit from a narrowing of this discount.

Some of the largest pension companies now offer a link to an investment trust. Scottish Equitable, for example, offers a choice of Edinburgh Investment, Baillie Clifford Japan, as well as its own funds to investors in its Reflex pension scheme. But these suffer from the conventional charging structures that insurance companies apply to personal pension policies.

A new sector of the pensions market, however, has grown to cater for those who want to use investment trusts for retirement planning. And, like the trusts themselves, it has established a reputation for low and transparent charges, with maximum investment of all premiums.

First into the field in 1990 was Skandia Life. It chose Foreign & Colonial (F&C), followed in 1992 by a policy linked with Flemings, a management group with much more specialised funds.

Today Flemings and F&C offer their own personal pension schemes as well as Skandia. They have recently been joined by Edinburgh Fund Managers (EFM).

In general, the investor has the option of linking to several or all the investment trusts offered by the particular group. The minimum contribution is pounds 50 a month or pounds 500 a year with EFM, or pounds 100 a month/pounds 1,000 a year with the other two.

The EFM scheme differs from the others in that while the initial minimum amount is invested in its 10 Edinburgh investment trusts, policyholders can choose to put any additional premium into a range of more than 20 trusts run by other management groups, including Flemings, F&C, Perpetual and Schroders. All three groups allow funds to be switched between the various trusts at a cost of pounds 15. Investors are also offered a "fund of fund"-type arrangement, leaving the investment choice to the management group.

The problem with taking out a personal pension directly with a management group is that the policyholder is limited to that group's funds. If the management changes or key people leave, the policyholder is stuck with the investment.

Merchant Investors, part of Allianz, Europe's largest insurance company, offers a means of avoiding this problem. With its Pension Portfolio, the investor is offered a choice of seven investment trust management groups, including F&C.

Like all good pension plans, those linked to investment trusts offer policy holders the option of moving into cash or a deposit fund as the investor nears retirement age. This is to avoid any downturn in stock markets, which can diminish capital just as the cashing-in date of a policy is approaching.

Investment trust-linked plans should be considered by everybody who is eligible to take out a personal pension policy. Compared with other pension plans, they pay less commission to financial advisers, but they offer one of the most efficient means of benefiting from equity-linked investment in retirement planning n