Stakeholder pensions, which companies with five or more staff must offer to their employees from 8 October, have been much talked about as an excellent way to build up a pension pot for your child, grandchild or non-earning spouse – providing you have the spare cash now. Similarly, many of those already in a company pension scheme could also set up a stakeholder plan and take advantage of the excellent tax breaks.
But stakeholder was never meant as a clever tax ruse for the well heeled. While the Government deserves praise for making pension provision more attractive to a wider audience, it is lower earners with no pension provision who need the greatest encouragement to save for their retirement. It is also important to start sooner rather than later.
At present, some five million adults in the UK don't have a pension scheme. With people living longer and the working population reducing, the State Earnings Related Pension Scheme (Serps) is too expensive for the Government to maintain in the long term. In view of this, stakeholder, while not designed to replace Serps, is intended to shift the responsibility of pension provision from the state to the individual.
In a bid to help this transition, the decision was taken to offer pensions through the workplace, but cynical employers might argue that the state is trying to offload much of the burden on to them.
Although stakeholder was not intended to solve the problem of how to get the low-paid to save for retirement, it was originally targeted at the needs of lower earners. It was devised as a means of encouraging both companies and individuals to contribute to retirement provision. However, stakeholder has met with widespread apathy from employers and employees alike. The Government needs to find ways to ensure that the average person takes more responsibility for funding his or her retirement.
Of course, compulsion is an option, but the first step must be to raise awareness among the general public of the value, or necessity, of preparing financially for the future. People need to be motivated to maintain and build pension provision.
The biggest incentive for contributing to a pension is that the Government also contributes by giving the individual immediate tax relief. The more you invest, the more the state puts in – currently 40 per cent for higher-rate taxpayers and 22 per cent for basic-rate payers. So for every £6 contribution put into a stakeholder pension by a higher-rate payer, the state makes it up to £10. Basic-rate payers must make a contribution of £7.80 for the state to take it up to £10.
Clearly this favours the better off, and it would help the Government to achieve its aims if a bigger slice of tax relief was given to those making smaller contributions; these are the people who need the most help and encouragement to fund their retirement. So, for example, contributions of £2,000 a year or below could get tax relief at 40 per cent, with basic-rate relief on amounts above this. Such a method would also be easier to administer for employers, the taxman and pension providers, as well as more trans- parent for those making contributions.
However, financial incentives to save are meaningless for those who simply cannot afford it. The obvious solution is to compel companies to contribute to their employees' personal pensions, but this would not be well received by entrepreneurs and small firms – two groups the Government seeks to encourage.
Inland Revenue figures indicate that employers already contribute to around 45 per cent of all occupational and personal pension schemes (although most of this is likely to come from larger firms). If stakeholder could attract a similar rate of contribution, it would be a resounding success. But this will be hard to achieve, as the new scheme may affect more than 500,000 small firms. Some 92 per cent of employers have between five and 50 staff and, until now, have largely ignored the question of employees' pension provision. Ultimately, the Government will have to look seriously at making employers' contributions compulsory.
Such a bitter pill would have to be sweetened. Currently, employers' pension contributions count as a business expense and are therefore offset against any tax liability. This, combined with a reversal of the increased National Insurance contributions levied on firms in the 1999 Budget, would soften the blow of a compulsory contribution – say, 3 per cent of salary.
So what are the implications of stakeholder for individuals? If you can afford to set up a scheme for a grandchild, for example, then do so. If your firm has not offered you membership of a stakeholder scheme, and you think it should, suggest it contacts an independent financial adviser, as non-compliance could lead to fines of up to £50,000 for employers and £5,000 for individual directors.
But for those who are hard up, pension opportunities are unchanged. Stakeholder may be transparent, annual charges may be better value and the scheme may be tightly regulated, but those who couldn't afford to put money into a pension before are unlikely to be able to do so now. Stakeholder will have to go through many changes before it can benefit those for whom it was intended.
Peter Maher is a director and head of corporate benefits at Smith & Williamson, a provider of financial advisory, accountancy and investment management services. Contact 020 7637 5377 or www.smith.williamson.co.uk