With the proposed pensions changes of 2012, there is a chance that stakeholder will dwindle as those planning for retirement will redirect their savings into a personal account, says Ceri Jones
When government proposals regarding personal accounts come into effect in 2012, employers will either have to offer staff access to the scheme or to an exempt pension plan. To qualify as an exempt scheme under the new regime, an existing stakeholder pension must at least match the contribution structure for personal accounts whereby staff will contribute 4% of salary, employers 3% and 1% will come from the government in the form of tax relief.
To be considered exempt, a stakeholder scheme must also auto-enrol employees every three years, as well as all new members of staff, and offer a default fund.
But the increased competition offered by personal accounts, even with a contribution cap set at £3,600, has raised concerns that stakeholder pensions could largely disappear.
In practice, when the proposed system goes live, a basic rate taxpayer who currently contributes more than 4% of salary into a stakeholder plan, but who receives no employer contributions, will – if properly advised – abandon the stakeholder plan and redirect their savings into a personal account in order to receive the additional 3% employer’s contribution.
But basic rate taxpayers currently saving less than 4% in to a stakeholder pension will pose a different problem. If they want to stay in the stakeholder plan, and their employer is prepared to keep it open, they will require close monitoring so they can be advised on whether to switch their pension arrangements in the future if, at any time, they increase their contribution to 4% of salary or more. Most employers may therefore prefer to close their stakeholder schemes, rather than deal with the administration of running two schemes.
Tom McPhail at financial planning firm Hargreaves Lansdown, says: “Stakeholder will wither on the vine. At that point, the [Department for Work and Pensions] (DWP) will remove the requirement for employers to designate a stakeholder arrangement.”
Ian Naismith, head of pensions marketing and development at stakeholder provider Scottish Widows, agrees: “Stakeholder plans could continue but it would be unlikely. The majority will go for [personal accounts], while the top end will be served by [self-invested personal pensions] (Sipps). The one factor that might swing that is if the [personal accounts] carry an upfront charge, which would put people off switching. It’s unlikely, but the initial costs have to be found from somewhere, and the government has been strongly lobbied not to subsidise these new plans.”
Another factor that may prompt employers to move away from stakeholder plans in favour of personal accounts is the potentially lower charges levied against the latter. But while it has been made clear that charges for personal accounts will be lower than the 1%-1.5% currently charged under stakeholder schemes, details of the investment options and charges for personal accounts will be decided by the newly-formed Delivery Authority. Jonathan French, pensions spokesman for the Association of British Insurers, says: “A benevolent employer might consider the range of investment options to be better in a stakeholder [scheme], but they would be better still in a personal pension. As far as we’re concerned, we want stakeholder to work alongside [these].”
One issue that should concern employers is that financial advisers, who normally earn commission paid for out of the fat charges levied on pension plans, will no longer earn enough to want to advise on whether to opt out of personal accounts. But good advice on this will be critical because the effect of means-testing on personal accounts for employees on very low earnings will be extremely difficult to forecast.
A feasibility study on how financial advice can be offered to the public is being undertaken by Otto Thoresen, chief executive at life insurer Aegon UK, who will report in the autumn. He will look at how a national advice scheme can be put in place.
For employers, auto-enrolment will boost take-up rates, resulting in higher contribution costs. The government claims that this will be the equivalent of average salary costs rising by 0.7%.
While stakeholder plans will more than likely vanish, employers with more generous pension schemes may reduce contributions in to line with those of personal accounts.
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- When the proposed system of personal accounts comes into effect in 2012, any employers with a stakeholder plan will either have to upgrade it to exempt standard, by offering auto-enrolment and a minimum employer contribution of 3%, or they must run it in tandem with personal accounts.
- Stakeholder schemes are predicted to be a casualty of personal accounts as employers make use of Sipps for the top end of their workforce and personal accounts for the lower.
- Neither stakeholder nor personal accounts carry sufficient charges to pay worthwhile commission to financial advisers. This could cause a potentially harmful advice vacuum.