Pensions play the markets

UNIT TRUST managers are seeking a bigger role in pension provision, following the lead of their investment trust counterparts but hoping to go further.

A pre-Budget submission to the Chancellor from the Association of Unit Trusts and Investment Funds (Autif) calls for tax changes to enhance the appeal of unit trusts as a vehicle for retirement planning. "The Government needs to devise ways to encourage the take-up of savings for retirement", says Autif's director-general, Philip Warland. "The proven safety and transparency of investment funds makes them ideal for simple, low-cost access to the investment markets."

Autif wants the Chancellor to introduce a new "independent pension account" as a way of topping up current pension provision. Under one option, it would work much like existing tax-free unit trust PEPs, but the pounds 6,000 investment limit might be raised. The quid pro quo is that account-holders would be unable to get at their money until reaching a minimum stated retirement age.

Another proposal from Autif would, again, be similar to PEPs but different in two respects. Account-holders would get basic-rate tax relief on contributions, but pay basic-rate tax when the plan was cashed in. PEPs involve neither relief nor payment.

A key innovation in Autif's proposed independent pension account is that retired people would be able to use their money as they wished, when they wished, on reaching a certain age. The current personal pension is subject to all sorts of restrictions. Most significant, the bulk of the accumulated fund must at some stage be turned into an annuity - a pension for life.

In a separate proposal, Autif wants to see the introduction of a "personal pension account". This would offer all the tax incentives available to current pension schemes, but again it would lose many of the Inland Revenue's present restrictions.

In practice, the unit trust industry will have a tough time persuading cautious Treasury civil servants, who have two main concerns. First, any pension arrangement must not be allowed to become simply an onshore tax shelter for the rich. Secondly, they want to ensure that people who exploit tax breaks to save for their retirement do not fritter away their accumulated capital and possibly fall back on means-tested benefits. This is why you can only get a proportion of pension funds back in income form every year.

In fact, individuals do not need to rely on Autif's proposals before using unit trusts to save for retirement. A number of providers already offer a SIPP (self-invested personal pension) option within the existing rules. Basically, the provider offers the personal plan tax shell and carries out the administration. But the plan-holder chooses and manages the investments, which can include unit trusts.

Separately, some unit trust managers are offering their own personal plans within existing rules, including Framlington, Gartmore, Invesco and Mercury Asset Management. The choice of investments is restricted to in-house funds.

However, the number of unit trust managers in the pensions business is almost certain to expand. The companies see a great marketing opportunity after the loss of consumer confidence in the life insurance companies, which used to have the field to themselves before the recent scandal over mis-sold personal pensions.

More positively, unit trust managers also believe that the relative transparency of their products gives them an edge. People can see exactly what they are buying and how much it costs with a unit trust pension, the argument goes. And what you get is a stock market investment wrapped up in a personal pension plan to enjoy the lucrative tax breaks of pension plans - relief on contributions to a scheme in which income and gains accumulate tax- free.

Traditional life company plans have been inflexible and opaque in terms of charges deducted, with all sorts of penalties for those who fail to maintain contributions or who want to retire earlier than the date first chosen.

However, both the mis-selling scandal and new disclosure rules on charges have compelled many life companies to revamp their personal plans. Many now offer the lower costs and greater flexibility which the public demands.

This means that unit trusts (and investment trusts) will find competition in the pension market intense. But, in theory, the ultimate winner of that competition should be the customer.