Money: Upheaval in pensions
New tax breaks make personal plans even cheaper, says Pamela Atherton
Sunday 19 September 1999
The move will give tax relief on the first pounds 3,600 of pension contributions each year, regardless of whether the policyholder is making the payments out of earned income or not.The tax relief would operate in the same way as mortgage tax relief, with basic-rate tax taken off at source. Higher- rate taxpayers are given relief at the end of the year.
The move will be particularly helpful to women who have given up work to bring up children, or to those who are acting as full-time carers.
The consultation paper also suggests integrating current personal pension schemes with the stakeholder plans due to come into force in 2001. Higher earners who want to save more than pounds 3,600 a year will still be able to in the same pension scheme - knocking out a main potential problem with stakeholder pensions. The effect is likely to be reduced costs on any scheme sold as a personal pension.
Even before last week's tax news, stakeholder plans were sending shock waves through the insurance industry. Only a few firms are likely to survive as lean, low-cost pension providers over the next 10 years. Having grown fat on the once enormously profitable business of selling life assurance and pensions, the industry is experiencing a rude awakening.
The Government has said it intends to set an overall 1 per cent cap on charges for stakeholder pensions - something now unheard of, and which few providers could meet. The main problem is that almost all financial advice is given on a commission-payment basis - you don't pay anything for the advice but a slice is taken out of what you pay into a pension and given to the person selling it. A 1 per cent cap will make it impossible for advisers to make a living unless customers pay upfront fees for advice.
The pensions industry is frantically lobbying the Government to raise the 1 per cent limit on charges so there is some leeway to pay for advice. Reports last week suggested there may be room for manoeuvre, but the overall cost of a stakeholder-style pension is going to be way below most plans now sold as personal pensions. These carry various charges - to pay for administration, fund management and advice - that can total be-tween 5 and 10 per cent a year.
And, in the run-up to the advent of stakeholder plans, the Financial Services Authority has said only pension contracts that can be converted to stakeholder plans "without material disadvantage to the policyholder" should be recommended by financial advisers and insurance sales teams.This rules out traditional plans with hefty upfront charges that mean your plan may be worth less than you've paid in for the first few years.
In a flurry of activity behind the scenes, pension providers have swiftly withdrawn expensive contracts and replaced them with more competitively priced policies (many still exceed the 1 per cent cap).
Other providers are promising not to claw back the high commissions (that they are still offering to their sales forces and IFAs) in the event that policyholders convert personal pensions into stakeholder contracts.
Figures from the Personal Investment Authority show that about one in five personal pension holders cease making contributions within the first two years. Meanwhile, pension providers are having to compensate investors for the pounds 12bn personal pension mis-selling scandal of the late 1980s and early 1990s. Within five years, there could be as few as half a dozen insurance company pensions to choose from.
The following are good, cheap contracts available now from firms likely to survive in the competitive pensions market.
Legal & General - personal pension
Scottish Widows - personal pension
Axa Sun Life - Select plan
Barclays - personal pension
CGU - Lifestyler pension
Norwich Union - Early Transfer plan
Source: Paul Smith Associates
- 1 Howard Jacobson: Let's see the 'criticism' of Israel for what it really is
- 3 Belgium fan Axelle Despiegelaere lands L'Oreal campaign after World Cup viral photo
- 4 Britney Spears sings 'Alien' without Auto-Tune in embarrassingly brilliant leaked audio clip
- 5 PornHub begs users to stop uploading video clips of Brazil getting beaten 7-1
Game of Thrones author George RR Martin says 'f*** you' to fans who fear he will die before finishing Westeros saga
Instagram of US airport security chiefs: Lipstick knives and IED training kits among items seized
‘Ryan Gosling got someone pregnant and it's not me. Brazil you think you’re devastated…’
Israel-Palestine crisis: ‘We just want it to end… We don’t deserve to live like this’
Israel-Palestine crisis: Eight killed in Gaza Strip cafe while watching World Cup semi-final
Sustained immigration has not harmed Britons' employment, say government advisers
Australia facing international condemnation after turning around Sri Lankans at sea
7/7 memorial defaced on anniversary of 2005 attacks with ‘Blair lied thousands died’ graffiti
Even when it brutalises one of its own teenage citizens, America is helpless against Israel
There’s a nasty smell in the political air – and it’s coming from the Tories
Vanessa Feltz criticises 'vile' reaction to Rolf Harris allegations
iJobs Money & Business
£60000 - £75000 per annum: Harrington Starr: Business Analyst Consultant (Fina...
£60000 per annum: Harrington Starr: A leading provider in investment managemen...
£600 - £700 per day: Harrington Starr: AVS, JVS Openlink Endur Developer JVS, ...
£30000 per annum: Harrington Starr: A global leader in trading platforms and e...