Stakeholder pensions: a nice idea

Nobody wants to rely on the basic state pension in their old age -- not unless a pay rise of 75p sounds appealing. The lucky ones are able to save for their retirement through a company pension scheme.

Nobody wants to rely on the basic state pension in their old age -- not unless a pay rise of 75p sounds appealing. The lucky ones are able to save for their retirement through a company pension scheme.

Occupational pensions are attractive because most employers make a contribution to your fund, typically between 3 and 5 per cent of salary, excluding bonuses and employee benefits. You can top this up with further contributions of your own and receive tax relief at your marginal rate.

Many people in employment have no access to an occupational pension scheme. At present they must either set up a personal pension plan or go without. Stakeholder pensions are designed to help them.

Plans will be available from April 2001. There will be two types, personal stakeholders sold to individuals, and occupational stakeholders provided by employers.

Both types allow everyone to contribute up to £3,600 each year. The only people who cannot take out a stakeholder plan are those in a final salary occupational pension scheme or contributing to a retirement annuity contract.

You will receive tax relief on your contributions -- higher rate taxpayers at 40 per cent and basic rate taxpayers at 22 per cent.

Not every employer will have to offer an occupational stakeholder. Those already offering all staff aged 18 or over membership of an occupational pension scheme will be exempt. So will those offering all employees membership of a group personal pension plan, provided they contribute 3 per cent of salary and there are no exit charges.

Occupational pensions currently come in three main types. The most attractive is the final salary pension scheme.

"Anybody offered a final salary scheme by their employer should accept it, provided they plan to stay in their job for several years," says John Hutton-Attenborough, senior financial planning consultant at Berry, Birch & Noble.

Final salary schemes pay a proportion of your final pensionable salary, depending on length of service. Typically, for each year you receive one-sixtieth of that salary. If you stay with your employer 15 years you will receive 15/60s of salary -- or one quarter.

The second type of occupational pension is the money purchase scheme. These invest in the stock market, and their performance determines how much you get at retirement. Poor performance will hit your pension.

If you are a member of either scheme, it is unlikely stakeholder will affect you. If you are in the final type of occupational scheme, a group personal pension plan, stakeholder will only have an impact if your employer contributes less than 3 per cent of salary to the plan. In this case they must offer stakeholder access.

"More than 90 per cent of employers using our pension scheme contribute 3 per cent or above," says Stewart Ritchie, director of pensions development at Scottish Equitable. "If your employer makes this level of contribution it is a no-brainer -- join its pension scheme."

Occupational stakeholder is designed to force those companies who currently make no pension provision to get their act together. By October 2001 all employers with five or more staff must offer employees with more than three months' service access to a company stakeholder or one provided by an affinity group, such as a trade association or trade union.

That is the good news. The bad news is that companies are under no obligation to provide the most attractive benefit of a workplace pension -- employer contributions.

"Employers who decide to make contributions will probably set up a group personal pension plan. Those who don't want to contribute on behalf of staff will go for stakeholder. You will then have to ask yourself whether this is a good thing to get involved in," says Ritchie.

One thing you will not be able to do is approach your employer for advice. "It is a criminal offence to give advice if you are not authorised to do so under the Financial Services Act. This is a trap for employers -- it would be very dangerous for them to suggest a course of action," Ritchie says.

That could leave employees having to pay for their own advice, or to go without.

Kay Ingram, director of accountants Morison Stoneham, says the "decision tree" produced by the Financial Services Authority to help people make stakeholder choices will prove wholly inadequate.

She also fears that given the confusion, many will be tempted to delay a decision to start paying into their pension. "I would not advise anybody to wait until October 2001. Delaying could reduce your annual retirement income quite substantially."

Stakeholder was meant to be simple and encourage many more people to save for their retirement. Instead it has sewn confusion. The lucky ones are in a good occupational scheme. The rest must brace themselves for some difficult decisions.

"Don't do nothing. Go to a fee-based adviser and pay for advice about what you should personally do," says Ingram.