Majority in the dark on stakeholder pensions

The launch of the Government's new scheme on 6 April is likely to be met with a mixture of ignorance and apathy, writes Harvey Jones
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The Independent Online

Just two months from launch on 6 April, the new Government-backed stakeholder pension scheme seems more likely to arrive with a whimper than a bang.

Just two months from launch on 6 April, the new Government-backed stakeholder pension scheme seems more likely to arrive with a whimper than a bang.

Almost eight out of 10 women and six out of 10 men have never heard of the new scheme, according to research published last week by IFA Promotion. Of those who currently have no pension savings, nine out of 10 said they had no plans to take out a stakeholder.

This must make depressing reading for the Government, who saw stakeholder as one of its big ideas to help those earning between £10,000 and £20,000 to save for retirement through a low-cost, flexible pension with tax advantages (and cut welfare state spending on the elderly into the bargain).

Stakeholder does offer some attractive inducements to save. It allows every man, woman and child to save up to £3,600 each year in a stakeholder pension, and get valuable tax relief on their contributions.

As with current pension contributions, higher-rate taxpayers get 40 per cent tax relief, while those on the basic rate receive 22 per cent relief. What is radical is that non-taxpayers and the unemployed can also claim tax relief, at 22 per cent. By extending these tax benefits the Government hopes to encourage housewives, carers and children to start building their pension savings. It means stakeholder could potentially benefit almost 44 million savers, say figures from Virgin Direct. They include employees topping up their workplace pension, staff with no company pension scheme, housewives, children and the unemployed, as well as the self-employed, existing personal pension holders and full-time students.

Stakeholder was originally intended to help the less well off, but it is the wealthy who will benefit most, warns John Turton, head of life and pensions at discount brokers Bestinvest. He says the unemployed, carers and housewives currently don't save for their retirement because they simply do not have the money. Even scraping together the £20 minimum monthly contribution required by most stakeholder plans will be beyond their pockets.

The wealthy, of course, do not have that problem, and they can use that £3,600 personal stakeholder allowance as a nifty way to reduce their tax bill. "The well-off will be able to invest money on behalf of their non-working spouses and children, and claim tax relief on their contributions," he says.

"Pensions for children is a fantastic thing for rich grandparents, who can make regular gifts to their grandchildren in the form of stakeholder contributions, claim tax relief, and steadily reduce the proportion of their assets eligible for inheritance tax."

You cannot get your hands on your stakeholder pension pot until age 50, which means money invested on behalf of children will have many decades to grow in value. "Somebody receiving full contributions up to their 18th birthday would end up with upwards of £425,000 in today's terms by age 50, assuming 7 per cent growth and 2.5 per cent inflation. If they retire at 60 they will be talking telephone numbers," he says.

Stakeholder currently has an even more grisly side effect. Unless current rules change, the money low earners scrape together for their stakeholder pension could end up depriving them of state support such as housing and council tax benefits. Currently, for each £1 a personal pension puts a low earner over the minimum income guarantee levels set by the Government, they lose 20p of any council tax rebate and 65p of any rent rebate due - a total loss of 85p for every £1 in pension income. Until this discrepancy is removed, attempts to persuade low earners to save in a stakeholder will doubtless be greeted with the contempt they deserve.

Despite its flaws, stakeholder has already scored one notable success, forcing grasping pension companies to ditch their traditionally inflexible, high-charging contracts. Personal pensions have traditionally come with a battery of charges, often gobbling up to 7 per cent of the value of initial contributions, with hefty annual management fees on top.

To make matters worse, many plans came with rigid terms that punished savers who changed their contribution levels or switched to a new pension provider. Many encashing their plans in the early years were given a transfer value lower than the value of their contributions.

Stakeholder has swiftly put an end to all this. Qualifying plans may charge no more than 1 per cent of your fund value each year to cover administration, investment costs and basic advice. Plans must also accept minimum contributions of just £20, and allow savers to stop, start, increase or reduce their contributions at any time without penalty, or transfer to a new provider without charge.

Adam Norris, managing director of Hargreaves Lansdown Pensions Direct, says the low-cost and increased flexibility of stakeholder allow savers to escape pension providers with below par investment performance.

"If your fund goes off you can switch pension provider without paying any exit penalty. This really puts the onus on insurers to provide the best possible investment returns, and growing numbers of insurers are now introducing specialist fund managers such as Merrill Lynch, Newton and Perpetual to run the pension funds on their behalf."

The 1 per cent maximum charge has provoked inevitable squeals of anxiety within the industry. Few will have any sympathy at the sight of insurance companies seeing their profits tumble.

But one potential drawback is that financial advisers cannot earn sufficient commission to make it worthwhile to sell a stakeholder pension. David Elms, marketing director of IFA Promotion, argues that this partly explains the current low awareness of stakeholder. He argues that savers need "easy access to professional, unbiased advice to clear up this confusion and to encourage them to commit to their future savings in the way that works best for them."

In practice, it means that if you want financial advice before choosing a stakeholder plan, you may have to pay the adviser a fee. At least this way you know your adviser is selecting the plan that best suits your needs, rather than the one that pays the most commission.

Aside from 6 April, there is a second key stakeholder deadline - 8 October 2001. That is the deadline for all employers with more than five staff and no qualifying pension scheme to offer a stakeholder pension. If your boss currently does not offer you a pension, he soon should, although he will not be obliged to contribute towards your fund. It is estimated that some 250,000 employers will have to set up schemes for around five million staff, or face fines of up to £50,000.

Yet two-thirds of 500 employers recently surveyed by insurer Prudential claim to know nothing about stakeholder, and one-third said they would do nothing even if it meant a fine. Whether this level of ignorance can be reversed over the summer remains to be seen.

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