Clients assessing their options among personal pensions and stakeholder schemes face a daunting choice where the categories are often blurred
It has taken 14 years, a massive mis-selling scandal and the threat of stakeholder schemes to persuade providers to remodel their personal pension contracts. At long last, many now meet the original 1987 specifications ' that is, they are genuinely portable and offer good value for money.
The dilemma facing advisers and their clients today is that between personal pensions and stakeholder schemes, there appears to be almost too much choice. Moreover, these two broad categories do not fit neatly into a personal pension performance versus stakeholder charges debate.
A significant minority of personal pensions meet the spirit of the stakeholder charging regime. Dave Roberts, a consultant at Watson Wyatt, explains: 'Many personal pension arrangements cannot qualify as stakeholder pensions even if their effective rate of charges falls within the 1% per annum stakeholder limit. This particularly affects arrangements based on investment trusts or products with fixed fee charges that cannot fit within the tight definition of how charges may be levied ' that is only in terms of a daily accrual at a rate of less than 1/365 per cent per day of assets.'
So how should clients assess their options? Where an employee does not have access to a traditional occupational scheme, a stakeholder scheme that incorporates an employer contribution is likely to offer good value for money. But if the employer does not contribute, then the differences between stakeholder schemes and individual personal pension plans are not as significant as many employees have been led to believe.
Stakeholder regulations ensure that these schemes guarantee modest charges and penalty-free entry and exit terms, among other features. They do not claim to be the cheapest nor do they guarantee good performance. Personal pension charges have tumbled in response to competition from stakeholder schemes and many of these plans offer a broader investment choice than is available under stakeholder.
Following the abolition of the link between earnings and pension contributions, there are three main tax-planning opportunities for wealthier clients who can pay up to £3,600 (£2,808 after tax relief) on behalf of:
A non-earnings spouse/partner
A spouse/partner who is in a company scheme but earns less than £30,000.
In each case, it is essential to consider the client's long-term investment requirements to decide whether a stakeholder, a multi-manager personal pension or a self invested personal pension (Sipp) is appropriate. This does not have to be a once and for all decision. There are no exit charges on a stakeholder scheme so you can always move the client into a more flexible plan once the fund has reached a critical mass.
Advisers report considerable interest in children's pensions, but before clients jump on the stakeholder bandwagon for young ones, they should bear in mind that pension tax breaks do not come unfettered. If their chief concern is saving for school or college fees, for example, or providing a deposit on a house, then a stakeholder will not do because the money is locked away until the offspring is at least 50 (under the present rules).
As far as spouse/partner's pensions are concerned, it is not just the non-earner who can benefit from your client's contributions. The concurrency rules allow an employee who earns less than £30,000 and is a member of an occupational pension scheme to pay up to 15% of salary ' that is, up to £4,500 ' into the main scheme and AVC combined and to pay up to £3,600 into a personal pension or stakeholder scheme.
This provides an excellent opportunity for the higher earner to fund the spouse or partner's stakeholder pension. If they do this, the partner can virtually double total contributions and be on target for a retirement income worth far more than the two-thirds of final salary maximum pension allowed from the traditional occupational scheme.
Where the client would benefit from something more dynamic than a stakeholder you could look at multi-manager personal pensions. The number of funds on offer through these plans varies, as does the cost.
If cost is an issue, several investment trusts offer personal pensions and these are likely to be cheaper than stakeholder schemes over the long term. Foreign & Colonial, JPMorgan Fleming and Edinburgh Fund Managers provide links to their own funds but Govett Investments' new pension plan will also offer access to a range of general and specialist investment trusts..
However, if you are looking for maximum investment flexibility, a low cost self-invested personal pension (Sipp) could prove very attractive. This acts as a tax-efficient wrapper in which the client can shelter virtually any type of collective fund as well as directly held equities and bonds and, in some cases, commercial property and other assets.
'For individuals who ultimately want to have full control over their pensions, a Sipp will usually be the preferred option,' says Roberts.
Several advisers, including Bestinvest and the stockbroker Killik & Co, have established an arrangement with providers to offer a stakeholder to complement their own Sipps.
Some of the low-cost Sipps restrict the investment choice, so do check this point. One company that offers the full range is Ipswich-based Suffolk Life. For example, once the fund is large enough the client can invest in commercial property ' an asset class in which Suffolk Life specialises.
For a client who is investing on behalf of a child, this could prove to be an exciting option if the young person develops a professional partnership or practice later in life.
'Investment in commercial property is the only method an individual has to gear up the pension fund by borrowing 75% of the cost,' says Nigel Bunting, marketing executive at the company.
The Suffolk Life Sipp has an annual charge of £110. This is a flat-rate fee, not a percentage of the fund, which means that once the fund exceeds £11,000, the annual charge effectively drops to below the 1% stakeholder maximum and the larger the fund grows, the lower the proportional annual charge.
If you are looking for a decent range of equities, bonds and funds, then an alternative is the Alliance Trust ' an investment trust that offers access to a self-invested plan. The trust provides a free administration service through its subsidiary Alliance Trust Savings and access to a wide range of equities, over 200 investment trusts, plus a selection of corporate bonds, gilts, unit trusts and open ended investment companies (Oeics). The only requirement is to invest £50 in either of the company's global growth funds ' the Alliance Trust or the 2nd Alliance Trust. You can only deal by post or signed fax at present although this will change shortly.
Low-cost Sipps are also available online from Charles Schwab, one of the UK's largest stockbrokers, Sippdeal, an online service that also provides the administration for Schwab, DLJ Direct and nothing-ventured.com, the online trading arm of Durlacher.
Before selecting an e-Sipp, it is clearly important to consider how frequently the client intends to trade and to check the annual charge (if applicable) in conjunction with dealing costs, as these vary considerably. The client should also consider the set up costs and the range of services offered. Those who require advice are likely to need a standard Sipp from an investment manager, but even here charges are coming down.
The choice is not as clear cut as personal pension performance versus stakeholder charges.
There are no exit charges on stakeholder so clients can move to a more flexible plan.
If you are looking for maximum investment flexibility, a Sipp could prove very attractive.
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