Personal finance: `Revolutionary' pension alert
The Treasury's new tax-free pension wrapper is a sensible move, but hardly new
Saturday 06 February 1999
Maybe I'm missing something here, but it doesn't seem like it to me.
What the Government seems to be proposing is that unit and investment trust companies, who have found it difficult to package products under a pension wrapper, will be able to do so more easily from now on.
A new tax-free wrapper, offering the same benefits as a traditional personal pension, will be applicable to occupational schemes, the proposed stakeholder pensions, even personal pensions. The quid pro quo for companies planning to use this wrapper is that their products must be cheap, with level charges and low or no entry and exit charges.
It is easy to foresee the effect of such changes. Life insurance companies have been kicked in the teeth. Their own products have been judged to be inflexible and far too expensive for investors. To that extent, what the Government has done is a sensible move. But it is debatable whether it really is as new as all that.
Unit and investment trust firms have always offered their products in pension form. However, independent advisers have tended not to recommend them, largely because of the low upfront commission they paid. Many companies have also offered "recurring single premium contributions", where you can pay regular monthly premiums - but without heavy charges. Again, most advisers "forget" to tell their clients about this option, for the same reason as before.
Will this change now that unit and investment trusts can be marketed more easily? To the extent that many advisers' clients are taking on board what this newspaper has argued for years, namely that charges are a critical aspect of any pension, it will have some effect, though not quickly.
The Treasury's liberalisation of its pensions wrappers is also positive: some will benefit from the wider investment choice. This, however, brings other problems. Is it sensible for savers to take out unit trust-style pensions investing in, for example, Latin America?
Proper advice is critical. Yet Ministers appear to be pinning their hopes on product "transparency" as a way of ensuring they are properly sold. Big mistake: I can see another pensions scandal looming here.
Another question mark hangs over the extent of this flexibility. This new vehicle is intended to enable people to move from employer to employer with it.
Assuming employers will allow you to do that. And that they will pay the same contribution into your pension vehicle as their own. There's no sign that they will be forced to.
While useful, these proposals don't constitute a revolution. We're still waiting for New Labour to deliver on that one and I, for one, am not holding my breath.
And why are 'southern' ways of speaking spreading north?
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