October 2007

Trusts

A matter of trust

As life expectancy increases the prospects of amassing a decent pension becomes more difficult even with an occupational pension, let alone the almost negligible state pension.

Those people expecting the state to look after them 'cradle to grave' need to think again. The basic state pension for the 2006/2007 tax year was just £82.05 per week. UK savers today need to be able to make alternative provisions for retirement, and over long periods of time stock market investments utilising investment trusts could provide the answer.

As any seasoned investor will know, any stock market investment whether a unit trust, open-ended fund or a closed-ended vehicle such as an investment trust can go up as well as down, and in light of the recent market turmoil, rather than risk the current stock market volatility, many retail investors today will be tempted to leave their money in the so called 'safe-haven' of cash.

It is worth pointing out that the benefits of a pure cash-based approach to long-term savings will inevitably be eroded by inflation over time. Although we would always advocate a balanced portfolio of investments recommended by an adviser, stock market investments, although more volatile, have historically provided real returns over the long term. Those investors who start making provisions for retirement early and are willing to commit to the markets long term should benefit from potentially higher returns.

Investment trusts have historically outperformed both cash and open-ended funds over the long term thanks to a combination of generally low fees and the use of gearing.

Compared to unit trusts or Oeics the overall cost of an investment trust is generally much lower, with many global trusts running on total expense ratios of less than 1%.

Many savers will want to focus on capital growth in the run up to retirement and then the potential for both capital growth and a growing income during retirement. The latter is particularly important as many living costs such as council tax or healthcare seem to increase far faster than inflation.

Therefore, we believe that investment trusts which can provide both capital growth and a strong dividend yield should be considered.

Pension plans are probably one of the more tax efficient ways to save for retirement in an investment trust, although tax advice should always be sought. As a higher rate tax payer each payment made into a plan will receive income tax relief. So for every £78 invested, the contribution will be grossed up by the taxman to £100 in respect of the 22% basic rate of tax while an additional 18% will be rebated to the taxpayer either through PAYE or by cheque.

Diversify portfolio

Utilising investment trusts within a self-invested personal pension (SIPP) or an individual savings account (ISA) as part of a retirement plan is a particularly efficient way of diversifying the overall portfolio beyond traditional asset classes. Closed-end vehicles are especially suited to less liquid alternative asset classes such as property, hedge funds and private equity, so specialist trusts focused on these areas can be held alongside core open-ended funds and traditional investment trusts.

have a steady stream of realising gains on earlier investments can pay attractive dividends to supplement a retirement income. Unlike conventional investment trusts and open-ended funds, VCTs may distribute capital gains made within the portfolio in the form of dividends and these are free of income tax. While VCTs are more specialist, and should only form part of a balanced portfolio, used selectively these can provide a boost to retirement income for wealthier investors who have already fully exploited their pension and ISA allowances.

The first investment trust, the Foreign & Colonial Investment Trust, launched in 1868 and since that time the size and number of investment trusts has grown to a £57 billion industry. However, they are still not as popular as their open-ended cousins, with more than £457 billion in assets under management in the UK. Perhaps the overwhelming reason is the fact that unlike most other stock market investments, they have not always offered the adviser community any commission. This has inevitably meant investment trusts have not been marketed as aggressively as open-ended funds so their investment advantages are less well known. However, times are changing. Depolarisation, which has seen many advisers move towards fee-based advice, has put investment trusts back on the radar of many IFAs and with a growing choice of investment companies to choose from, there is something for everyone making arrangements for their retirement.

Julie Dent
Manager
British Assets Trust and the F&C Multi Manager Investment Trust