Investing in an investment trust via a pension scheme has long been considered a niche investment but with public confidence in traditional personal pensions at a low ebb, the benefits offered by such products could prove attractive
Pensions have had a bad press of late, yet most people would acknowledge the need to save for retirement. The majority of savers are only too anxious to ensure that when they stop working, they, and indeed their children, will have enough income that they do not have to rely on an inadequate state pension. Despite this, sales of conventional pension plans have suffered, with the public's confidence being undermined by problems in the pensions industry, the failure of Equitable Life in particular.
People want to know that their retirement savings are going into a sound investment ' one that is relatively secure. If held within a tax-efficient pension wrapper, so much the better, provided the costs aren't too great. Yet when investment trust pensions were first launched some 10 years ago, the idea of an investment-based, low-cost pension plan was somewhat unusual. As a result, this type of pension came to be regarded as something of a niche product.
We feel this situation has changed and the time for investment trust pensions has arrived. Investing in an investment trust via a pension offers an attractive combination of features: they are low-cost, they can be built on long-established investment trust platforms and they offer all the normal benefits associated with personal pension schemes such as tax relief on contributions, funding requirements and options at retirement.
Another benefit is the flexibility that investment trust pensions offer to savers. Contributions can be increased or decreased easily without penalty and, if necessary, payments can be stopped altogether, again without penalty.
The key difference between unit trusts and investment trusts is that the latter are stock market quoted companies in their own right. This gives them a couple of advantages. Investment trust managers are not forced to sell holdings if investors need to access their capital ' shareholders can simply sell their shares in the trust. While this might affect the share price, it will not affect the way the manager runs the trust.
With unit trusts, a manager may have to sell some of the fund's best holdings to meet redemptions. Investment trust managers are also able to take advantage of gearing, giving investors the prospect of enhanced returns in rising markets.
The large global growth investment trusts, along with a host of others, have weathered countless economic storms ' two world wars, the Great Depression and many a stock market crash ' but they are still here. Global growth investment trusts have more than proved their worth. Given these many benefits, it is not surprising that over the past few years, the major players in the investment trust arena have launched their own pension schemes. The Witan Simple Contribution Pension, launched late last year, sits alongside other providers of investment trust pensions including Foreign and Colonial, JPMorgan Fleming and Edinburgh Fund Managers. These pensions offer real attractions for long-term savers, without the disadvantages of more traditional pension schemes.
They are not opaque like a with-profits fund or managed tracker. They are also inexpensive, actively managed, can be monitored for performance and have transparent charging structures.
A number of investment trust pension providers have teamed up with third parties to provide their pension administration, one exception being Alliance Trust Savings, which is owned by the self-managed Alliance and Second Alliance Trusts. As it held a banking licence, Alliance was able to set up its own pension plan.
Despite their attractions, it may be that intermediaries and investors alike have been slightly reticent about investing in investment trust pensions because they are seen as a relatively complicated product, suitable for the more sophisticated investor. Witan seeks to challenge that view and has developed a pension that is more simple and straightforward to understand, hence the word simple in our branding.
Although investment trust pension schemes are personal pensions rather than stakeholders, the charges for contracts can work out well within the 1% limit. The reduction in yield on our pension scheme, assuming an annual investment of £3,600 gross over 10 years, is just 0.8%. These pensions are therefore suitable for the same market as stakeholders and are likely to have a particular appeal to those who are no longer completely confident about entrusting their savings to some of the larger insurance companies, whose financial stability is often a matter of speculation in the media nowadays.
The other group to whom investment trust pensions are likely to be particularly attractive are those who are buying pensions on behalf of non-earning spouses, children or grandchildren. This is a growing market and is becoming an increasingly important aspect of many families' financial planning.
It is a highly tax efficient form of saving as basic rate tax relief can be claimed, even though the pension holders are non-taxpayers. This means the maximum contribution of £3,600 will only cost the investor £2,808. This allowance could become even more important when tax credits on equity Isas are withdrawn at the end of the tax year.
One of the reasons some financial advisers have given in the past for their reluctance to sell investment trust pensions is the need to explain to investors the issues surrounding discounts to net asset values, gearing and a potential for greater volatility. In the case of big, liquid trusts, this argument is a bit of a red herring.
Buying and selling investment trusts is really no different from investing in other types of shares and is just as transparent. Trusts are purchased at one price and sold at another by private investors who pay little attention to the companies' assets or borrowings. This transparency enables them to see exactly where their money is going and check the level of performance regularly. In the case of Witan, which has a modest level of gearing, the discount has remained relatively stable for a long time, so it has not proved a particularly volatile investment in this respect.
Large international investment trusts are widely recognised as attractive long-term savings vehicles, so holding them in a pension is a logical development. Traditionally, many pension fund managers have themselves held such trusts in their funds so when private investors buy their pensions direct from an investment trust group, they are effectively cutting out the middle man. At the same time, they are considerably reducing their costs. Above all, what they get is a product from a provider whose emphasis is on producing the best possible investment returns.
Investment trust pensions offer the flexibility to alter levels of contribution without penalty and at a low cost.
They are more transparent than other pension investment vehicles like with-profits funds.
Investment trust pensions may be attractive for those buying pensions for non-earning spouses and other family members and for those not confident in the financial stability of insurance companies.
Head of UK intermediary distribution
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