Investment trusts to boost your pension

Investing your pension is typically a long-term affair. Younger investors have decades ahead of them in which to get maximum growth from their pot, while those who can rely on other sources of income in retirement can take a similar approach if they wish to grow a pension pot and then pass it on.

For some, going for growth simply means taking on some form of equity exposure and letting investment gains compound over time. But self-invested personal pensions (Sipps) also allow investors to be pickier, and having such an extended time horizon means you can afford to go for riskier bets that may take decades to deliver the best returns.

Stockpicking is one option here, but in the funds world there’s a strong case for the humble investment trust. That’s because trusts can act as a pure play on active management: trust investment managers can boost their returns using gearing, take more concentrated bets than many open-ended funds, and back less liquid assets that promise superior returns. In short, trusts are well structured to capture the gains made by active managers – provided their strategy works out.

Investors will also benefit from minimising their costs over the longer run, and one component of the fees you pay can sometimes be lower for trusts. Some of the major platforms, including Hargreaves Lansdown and AJ Bell, tend to cap the annual charge levied on holdings in shares – meaning it can be more cost-effective to back trusts and exchange traded funds (ETFs) than open-ended funds.

Having made the case for trusts, why do they actually stand out? Much as they appeal to many investors as a route to illiquid assets such as infrastructure, property and private equity, closed-ended funds have still managed to hold their own in conventional asset classes. 

Where trusts have stood out

Mick Gilligan, head of managed portfolio services at Killik & Co, notes that 17 trusts have provided a share price total return of 1,000 per cent or more over the 20 years to 11 May 2023. As the table shows, 10 of these are focused on small and mid-cap stocks (if we include Biotech Growth (BIOG)), indicating that trusts’ ability to hold less liquid shares has certainly paid off.

Many of the other names have also benefited from trends that have proved dominant in the past decade, from tech and healthcare growth portfolio Scottish Mortgage (SMT) to the Allianz Technology trust (ATT). Some of the private equity trusts also make an appearance, providing a stark contrast to the wide share price discounts that have haunted the sector for so long.

Looking at future prospects, Gilligan notes that smaller companies are out of favour amid monetary tightening but notes “Investors that can look through this stand to do well from some smaller company exposure in their Sipps”. He currently favours the likes of Aberforth Smaller Companies (ASL), BlackRock Smaller Companies (BRSC), River & Mercantile UK Microcap (RMMC) and Strategic Equity Capital (SEC) for UK exposure, with overseas options including Baillie Gifford Shin Nippon (BGS), European Assets (EAT), Nippon Active Value (NAVF) and North Atlantic Smaller Companies (NAS), Smithson (SSON) and Global Smaller Companies (GSCT).

Otherwise, Ryan Hughes, head of investment partnerships at AJ Bell, notes that trusts have in some cases outpaced open-ended funds run by the same teams, with Alex Wright’s Fidelity Special Values (FSV) well ahead of Fidelity Special Situations (GB00B88V3X40) over 10 years. However as we’ve previously highlighted, the trust will not always outperform the open-ended equivalent, and investment trusts are especially vulnerable in a sell-off.

But trusts have tended to work well as a play on sectors, with Hughes pointing to the short-term underperformance yet long-term attractions of names such as Polar Capital Technology (PCT) and Worldwide Healthcare (WWH). However, it’s worth considering that open-ended funds can also deliver the goods here. The Allianz Technology trust has delivered a huge 511.9 per cent share price total return over the decade to 18 May, with the Polar Capital trust on 418.6 per cent. But open-ended funds make their presence felt here too, with Fidelity Global Technology (LU1033663649) returning 560.2 per cent and the passive L&G Global Technology Index Trust (GB00BJLP1W53) up 502 per cent.

Horses for courses

Hughes believes that trusts can stand out even in relatively conventional areas, with the mainly global equity-oriented F&C (FCIT) significantly outperforming the FTSE All World index over a 20-year period. “A core global strategy such as this can prove to be a very useful anchor in the portfolio to build other more aggressive holdings around,” he notes.

A bigger question, in his view, relates to whether investors can stick it out with trusts when volatility inevitably strikes. “All actively managed investments will have periods of underperformance, but the key is to use these periods to buy more, particularly with trusts that can move to a significant discount,” he says. “If you believe in the strategy and are still taking a long-term view, use these opportunities to add to your investments rather than panic and sell out as the compounding benefit of this over the long term can be significant.”

Investors therefore need to be hardy – and perhaps have more of an eye for opportunistic buying when trusts are out of favour. Chunky discounts are still available, especially in areas such as private equity where investors still seem wary about the reliability of stated net asset values (NAVs). The likes of HarbourVest Global Private Equity (HVPE) recently traded on discounts of more than 40 per cent to NAV, to give just one example.

But this won’t be for everyone – the enhanced volatility of a trust means that it might be less well suited for the Sipp investor looking to take a more defensive approach, or for those with a lesser appetite for risk. We’ve previously highlighted that some advisers tend not to direct some clients towards trusts, simply because they can be so volatile and cause problems for those in pension drawdown.

How retirees can continue saving into a pension

You can keep paying into a self-invested personal pension (Sipp) after you have accessed a workplace pension, although must be under age 75 to qualify for tax relief on contributions. It can make sense if you’re still working and have a final-salary pension scheme that has started paying out, particularly if any increases you receive in income for delaying taking the pension don’t make financial sense. Some public sector schemes start paying out at age 55, but people often continue working in other jobs after they have left their public sector roles.

Paying into a Sipp after you have started to take another pension can provide additional funds after your death to partners and spouses. Pension contributions receive tax relief at your marginal income tax rate.

However, there are limits to what you can put in, depending on your circumstances. Taking a defined benefit (DB) or state pension will not trigger the mechanism that restricts what you can pay into your pension. This is the money purchase annual allowance (MPAA). So if you are receiving a DB pension you might be able to contribute up to £60,000 a year or the value of your taxable earned income, whichever is lower. However, bear in mind employer contributions also count towards this limit and if you are employed and earn more than £10,000 a year, your employer is obliged to pay into a pension for you. If you don’t have any taxable earnings because, for example, you have retired, the most you can put into your pension and receive tax relief on is £2,880 a year, which increases to £3,600 following the 20 per cent tax relief.

However, if accessing a workplace pension triggers the MPAA, because it is a defined-contribution or stakeholder pension, then you cannot save more than £10,000 a year, including employer contributions, and receive tax relief. But even if you have triggered the MPAA, you can have an occupational DB pension which increases in value by up to £50,000 each tax year – whether from contributions, growth or a combination of the two. This may be the case, for example, if you have an NHS pension alongside a money-purchase pension.

There are ways to draw from money-purchase pensions without triggering the MPAA. Only spending the 25 per cent tax-free cash entitlement or buying a lifetime annuity does not trigger the limit. Cashing in a small pot worth £10,000 or less is also exempt.