Stakeholder schemes conjure up for many visions of huge pension schemes for members of affinity grou...
Stakeholder schemes conjure up for many visions of huge pension schemes for members of affinity groups such as trade unions, employer associations and of course the employees of companies with five or more members of staff that do not already operate a qualifying company pension scheme. The scale of this smaller company market should not be underestimated - just over two million people work for 310,000 companies employing between five and 19 staff, according to the Department of Trade and Industry.
From inception, value for money has been a key objective for the Government and, despite considerable pressure from the industry, it has stood firm on the 1% per annum value of fund cap on charges.
As a result, stakeholder philosophy has rocked the traditional pensions industry as it demands a new and challenging attitude towards administration and distribution.
The press is full of the opportunities for worksite marketing, the internet, e-commerce and the mass scale distribution necessary for the providers entering this field.
Deep pockets are also required as it could take many years, some say over 20, to recoup costs. At the end of the day, once the dust has settled there could be just a handful of key stakeholder providers left.
While the workplace will naturally be a key area for marketing stakeholder pensions, they will also need to be distributed on an individual basis. Lest we forget, 12% of the labour force is self-employed and 40% have no private pension provision.
Moreover, the number of self-employed in the UK is growing. Then there are all those employees whose employer does not have to designate a stakeholder scheme.
According to the Government these firms make up two thirds of UK employers and have a total of 750,000 staff who could be without a pension. This is a huge individual pensions market which has always existed for personal pensions but has now been expanded dramatically in a way which will create new tax planning opportunities for those who can see them and act on them. In its drive to create a simple, low cost private pensions arena, primarily aimed at employees who are middle income earners, the Government has also opened the door to a whole new market where the wealthy will be the beneficiaries.
The new Defined Contribution (DC) regulations come into force from April 2001 and will cover personal pensions, stakeholder schemes and occupational money purchase schemes that effectively opt for them.
These regulations greatly simplify the pension system and one aspect key to this simplification is the lost link with earnings for contributions of up to £3,600 in a tax year (contributions above this level are limited to the current personal pension age/earnings related limits).
In addition, in a move which stunned the industry, the Government announced that contributions could also be made by third parties such as parents on behalf of children. While it was the Government's intention that this lost link with earnings for pension contributions of up to £3,600 would enable carers, for example, to build up a pension fund, in reality, only those that can afford it will benefit.
Sizing up the market
The true scale of the individual market for pensions can now be appreciated - the self employed, employed with no designated scheme, and third party pensions for spouses, children and grandchildren. Shrewd providers and advisers may be looking at this marketplace with some interest.
The logistics of operating in the corporate stakeholder marketplace are beyond many and the audience is likely to be moderate to low earners, meaning there may be little in it for anyone immediately. On the other hand, pensions products and planning opportunities for the individual marketplace may be far more lucrative.
While it is true to say that some of these unpensioned individuals will be low earners falling into the Government's stakeholder target group, many will be high earners requiring advice on individual pension arrangements and other investments - the wealthy director, doctor, dentist, self employed computer consultant or partner in a solicitor's practice.
For many, the thought of being able to offload a significant amount of surplus money into the family pot (spouse and children) through a decent tax efficient savings vehicle may seem quite attractive.
There also appears to be nothing standing in the way of grandparents putting money away for their grandchildren. With first hand experience of the problems of old age and retirement, many may see this as a very prudent and responsible way of helping to secure their grandchildren's future. The Government will have also achieved its objective in terms of reducing reliance on the state in the future. Quite how all this will fit in with inheritance tax planning will no doubt be revealed in the near future.
Stakeholder is of course not the only product on offer to these people as personal pension plans will still be around after April 2001. However, it is questionable whether they will be the preferred choice. Stakeholder pensions and personal pensions are governed by the same Defined Contribution regulations but stakeholder pensions have standards to comply with including the 1% maximum charge. Any personal pension hoping to compete with stakeholder must at least match this charge and be able to offer more on top.
It has been banded around with great regularity that stakeholder pensions will have only a limited fund choice but this argument now appears to be weakening as potential providers indicate they will be offering more than just a tracker fund. Any edge a personal pension may have come April 2001 is likely to be a weak one and with a five million pound Government backed advertising campaign plus of course designation for all those employers, stakeholder pensions are likely to be on the lips of many.
Therefore, apart from self-invest