Newcomers bid for a future based on trust

Investment trust companies are pushing strongly into the pension business, taking advantage of the opportunities which traditional pension providers have, for a variety of reasons, failed to take. Foreign & Colonial has offered a pension scheme based on investment trusts rather than the traditional unit-linked or with-profits pension schemes since 1994.

Edinburgh Fund Managers has also been in the business for two years. Earlier this year Flemings joined in and EFM has now come back with a new scheme offering a choice of two in-house pension plans investing in investment trusts and the option to switch into investment trusts offered by half a dozen other leading managers if required.

It features a commitment to clear and comprehensible explanations of what precisely is involved, a transparent charging system, low actual charges, flexibility, and a significant absence of penalties for switching assets once they have been invested. In its way this trend could be as influential in popularising personal pension plans and additional voluntary contributions as the trend toward abolishing initial charges, which has revolutionised the unit trust and PEP scene over the last two years.

If so it is not before time. There is a crying need for investors to build up their private pension provisions to cope with the trend away from lifetime careers and company pensions towards frequent job changes and early retirement. The Government does its bit by allowing full tax relief on all earned income invested in pension plans. Anyone paying tax at 40 per cent can in effect reclaim the tax and invest pounds 100 in a pension scheme at a net cost to themselves of just pounds 60.

But people are simply not putting anything like enough into pension plans. This is not just the result of lack of money although it is a fact that most young people still prefer to spend rather than provide for old age, and most people with families find they have little or nothing to spare to put into a pension plan at least until their children are off their hands.

The insurance companies which have provided the vast bulk of personal pension plans and additional voluntary contribution schemes for the past 30 years must bear much of the blame. There is still a cloud of suspicion over insurance companies, which were all more or less involved in selling inappropriate personal pensions to punters who should have stayed with their company pension schemes.

Traditional providers have not helped themselves by sticking to a complex system of charges which the vast majority of punters still does not fully understand. The illustrations that providers tend to offer to would-be buyers are usually combined with the projected returns based on assumed rates of return, and it is only by comparing the projections that buyers can begin to appreciate the impact of charges.

Thanks to the Financial Services Act and the partial disclosure it requires, investors are increasingly aware that charges can be high and significantly erode the long-term performance of a pension fund. But most punters still do not twig that the money they put into a traditional with-profits or unit-linked pension is subjected to a variety of up-front deductions to cover adminstrative costs and commission paid to agents and salesmen. Older investors may find that less of their funds are invested than younger investors. Most traditional funds invest in unit trusts and are subject to the standard 5 per cent bid-to-offer charge which applies to unit trusts.

Annual management fees of up to 1.5 per cent a year are quite normal and in some cases there are a series of penalties for transferring to another fund before retiring, for retiring early and for taking the fund elsewhere on retirement.

Investment trusts are cheaper because there is no bid-to-offer spread, although all purchases and switches between trusts incur the standard stamp duty charge of 0.5 per cent which applies to all share purchases. The long-standing disadvantage of investment trusts that the trusts were at a discount to the assets they invested in has largely disappeared.

Flemings levies a flat pounds 100 fee to set up a pension, and the annual charge is pounds 50 plus 0.5 per cent of the value of the fund, reducing to 0.25 per cent when the fund reaches pounds 10,000. Funds can be invested in a managed fund where the investment decisions are taken by Flemings, or in a choice of Flemings' 18 investment trusts. The minimum investment is pounds 1,000 or pounds 100 a month.

Edinburgh Fund Managers has gone even further. It guarantees that 100 per cent of all contributions to its new funds will actually be invested into investment trust shares. Investors can choose to leave all investment decisions to the managers or to switch between 10 different EFM investment trusts or even to buy investment trusts managed by a dozen other providers including F&S, Fleming, and 3i.

The minimum investment is pounds 50 a month or a single lump sum of pounds 1,000, which can be added to at any time. Investors will have to pay a fee to cover commission if they buy from a commission-earning independent financial adviser but no commission is charged if they buy direct from Edinburgh itself. The initial charge is a flat pounds 100 rather than a percentage. There is a flat pounds 50 annual management fee plus a percentage charge of 0.25 per cent every six months, That adds up to pounds 100 or 1 per cent on a fund of pounds 10,000, pounds 150 or 0.75 per cent on a fund of pounds 20,000 and pounds 200 or 0.5 per cent on pounds 40,000.

In a perfect world perhaps the managers might have tailored their charges fully to the performance of the investments, but the system they have brought in is a big improvement on the traditional methods used by the insurance companies.