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A well-kept pension savings secret
By Gail Moss
Investment trusts may not be an obvious choice when it comes to pension saving, but just like pension plans that invest in unit trusts, investment trust pensions give you the ability to save regularly over time to build up a pension pot.
The pension wrapper means you get tax relief on your contributions at your highest rate of tax, and you have the assurance of investing in a diversified portfolio managed by professionals.
Investment trusts have certain advantages over unit trusts. Like the latter, they build up portfolios of shares, with a view to enjoying capital appreciation and income from dividends. But, unlike unit trust companies, which create and liquidate units when there are net inflows or outflows of investor cash, investment trusts are closed-ended funds. This means that the number of shares issued generally remains the same.
This makes the trusts ideal for long-term pension savings, as share dealings take place between buyers and sellers, and not through the trust. So managers can take investment decisions without the need to liquidate holdings when a large number of investors want to pull out.
You also have the potential of capital uplift if you buy investment trust shares at a discount. Each share has a net asset value (the value of the trust's entire portfolio, divided by the number of shares in issue). Investment trust shares usually trade at a discount to their net asset value - in other words, the market price is lower. A skilful manager can bring the share price closer to its net asset value, giving a boost to the share price. Furthermore, investment trusts can also borrow money (known as 'gearing'), allowing them to lift returns even more.
Investment trust pensions also tend to be cheaper than other types of packaged pension, as the underlying fund charges are lower. Many of the largest, most popular trusts have total expense ratios of 0.5% or less, compared with stakeholder pensions, which can be as high as 1% a year, or 1.5% a year for the average unit trust.
The pension wrapper itself is also modestly priced. Of the six or so investment trust pension schemes on offer, two - from JP Morgan and Alliance Trust - have no initial charge, while the rest charge £100. The same two plans also have no annual charge, while the rest charge £50 a year flat admin, and a 0.5% a year management fee. However, their dealing charges are slightly higher. Different levels of choiceThe four most widely used schemes have differing levels of investment choice. JP Morgan offers shares in four of its trusts - Claverhouse, Managed Growth, Managed Income and Overseas, plus a cash fund. Gavin Haynes, managing director at IFA Whitechurch Securities, considers JP Morgan to be a leading investment trust house, with a wide range of trusts. "Claverhouse is a more conservative equity offering, while Managed Income is a cautious, high-yielding trust that's very suitable as a core pension investment," he adds.
Elsewhere, F&C offers six of its trusts - three for capital growth and three for capital and income growth - for pensions, plus the ability to switch into a high-interest deposit account. Haynes says: "F&C is best known for the large F&C Investment Trust, which has had mixed fortunes. But it's strong in specialist areas, such as the Graphite Enterprise Trust, which invests in smaller and unquoted companies."
The Select Pension from Alliance is in effect a self-invested pension plan, offering a much wider choice, including shares in the Alliance Trust, and in other unit and investment trusts, listed shares, fixed interest securities, exchange traded funds and cash.If you need even more choice you can head for a full-blown SIPP, which allows you to invest in all the above (including investment trusts), as well as structured products, derivatives and commercial property.
However, SIPPs are generally more expensive to set up and run, so they require more money to make them worthwhile. And they can also prove riskier for investors who wish to manage their portfolios themselves.
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