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What are they?

Investment Trust pensions Investment trusts are pooled equity investments, typically in a wide selection of stocks and shares. A number of investment trust management groups allow you to pay pension contributions, enjoying the usual pension tax advantages, into one or more of their trusts.

Q: For whom are they a suitable product?

A: Anybody with a company-sponsored or occupational scheme, enjoying employer contributions, is well-advised to stay with the scheme. But for the self-employed or those without a company scheme, investment trust pensions should be considered alongside the traditional insurance company personal pension. Investment trusts can also be used as a free-standing additional voluntary contribution to top up a company pension.

Q: So exactly how do they work in practice?

A: Your pension contributions are used to buy shares in an investment trust, whose value may go down as well as up. The value of the pension is determined by the performance of the trust, minus costs, over the investment period. Investors pick a trust or a selection of trusts offered by the manager, and switches can be made between trusts. Minimum contributions can be as little as £100 per month or £1,000 lump sums.

Q: What are the advantages over traditional personal pensions?

A: Personal pensions are the domain of the insurance industry, and are criticised for high set-up charges and onerous ongoing administrative charges. In some schemes these can result in a serious reduction in future returns. Investment trusts generally have lower and more transparent charges. There are no baffling “capital” or “accumulation” units or “nil allocation periods”. Investment trust personal pensions also have a high degree of flexibility. There are no penalties for stopping, starting or varying contributions or retirement date.

Q: What are the disadvantages of investment trust personal pensions?

A: Volatility and spread of investments. Having all your pension eggs in one investment trust basket can be an extremely risky strategy. Insurance company personal pensions tend to be invested in lower-risk, with-profits funds, which have a spread of foreign and domestic equities, bonds, property and cash. The aim of the with-profits fund is to smooth returns and lock in gains. They also usually have mechanisms to transfer your money into lower-risk investments to avoid a stock market crash wiping out your fund weeks or months before retirement Investment Trust pensions Investment trusts are pooled equity investments, typically in a wide selection of stocks and shares. A number of investment trust management groups allow you to pay pension contributions, enjoying the usual pension tax advantages, into one or more of their trusts.

Q: For whom are they a suitable product?

A: Anybody with a company-sponsored or occupational scheme, enjoying employer contributions, is well-advised to stay with the scheme. But for the self-employed or those without a company scheme, investment trust pensions should be considered alongside the traditional insurance company personal pension. Investment trusts can also be used as a free-standing additional voluntary contribution to top up a company pension. Q: So exactly how do they work in practice? A: Your pension contributions are used to buy shares in an investment trust, whose value may go down as well as up. The value of the pension is determined by the performance of the trust, minus costs, over the investment period. Investors pick a trust or a selection of trusts offered by the manager, and switches can be made between trusts. Minimum contributions can be as little as £100 per month or £1,000 lump sums.

Q: What are the advantages over traditional personal pensions?

A: Personal pensions are the domain of the insurance industry, and are criticised for high set-up charges and onerous ongoing administrative charges. In some schemes these can result in a serious reduction in future returns. Investment trusts generally have lower and more transparent charges. There are no baffling “capital” or “accumulation” units or “nil allocation periods”. Investment trust personal pensions also have a high degree of flexibility. There are no penalties for stopping, starting or varying contributions or retirement date.

Q: What are the disadvantages of investment trust personal pensions?

A: Volatility and spread of investments. Having all your pension eggs in one investment trust basket can be an extremely risky strategy. Insurance company personal pensions tend to be invested in lower-risk, with-profits funds, which have a spread of foreign and domestic equities, bonds, property and cash. The aim of the with-profits fund is to smooth returns and lock in gains. They also usually have mechanisms to transfer your money into lower-risk investments to avoid a stock market crash wiping out your fund weeks or months before retirement.

Q: What sort of charges are involved?

A: There is an initial set-up charge, typically around £100, an annual administration fee of around £50, and an annual management charge of up to 0.5 per cent of the value of the fund. Stamp duty of 0.5 per cent is also payable on share purchases and switches. There is also the question of fees to advisers. Investment trusts are usually aimed at fee-based brokers and so are not generally structured to pay out commission.

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