Article for IFAonline by Ian Naismith, Head of Marketing & Sales Technical, Scottish Widows. The...
The advent of stakeholder pensions presents a new choice to many people in company pension schemes who want to save more towards their retirement. For many, stakeholder is a viable alternative to additional voluntary contributions (AVC) and free-standing AVC plans (FSAVC), and they may seek advice from IFAs on the best option.
The Government accepted an industry proposal for 'partial concurrency'. This means that many employees are eligible for a stakeholder plan (or any other personal pension) alongside occupational scheme benefits. The effective rule for tax year 2001/2002 is that the individual
·must have earned no more than £30,000 in tax year 2000/2001 (excluding P11D benefits), and
·must not have been a controlling director since 5 April 2000.
In the longer term, the criteria will move to there being at least one tax year in the five before payment when the individual earned no more than £30,000, and not having been a controlling director in the tax year of payment or any of the previous five.
The maximum payment in the tax year for such employees is £3,600. Benefits arising from such payments are not taken into account in calculating maximum benefits from the occupational scheme.
Employees who do not qualify under the partial concurrency rules may still be able to start a stakeholder plan. They will be eligible if they have additional non-pensionable earnings (however small), and can pay at least £3,600 a year (more if their non-pensionable earnings justify it).
A key consideration for many people is that stakeholder offers up to 25% tax-free cash at retirement, with a correspondingly reduced pension. Tax-free cash is normally only available from AVC plans that started before 8 April 1987, and not at all from FSAVC plans.
But AVCs may increase tax-free cash from the main scheme. For members who are in, or opt into, the 'post-1989' regime, the tax-free cash can be 2.25 times the pension before commutation. This pension includes AVC or FSAVC benefits.
In addition, some scheme offer 'added years' AVC benefits, and in that case tax-free cash is available as for main scheme benefits.
In many cases, a stakeholder plan may lead to more tax-free cash than an AVC or FSAVC, but it is important to look at the individual's tax regime and at the scheme benefit structure before giving advice.
Stakeholder benefits can be taken at any time between age 50 and age 75, and need not be linked to taking benefits from the occupational scheme.
AVC and FSAVC benefits may now be started before main scheme benefits if the scheme rules allow it. However, AVC benefits started before the main scheme pension must initially be taken as income drawdown, and any tax-free cash cannot be paid until main scheme benefits start.
AVC and FSAVC benefits may also start after main scheme benefits if the scheme rules allow this, but again the tax-free cash is affected. For a pre-8 April 1987 arrangement, any tax-free cash is paid at the same time as main scheme benefits (and the pension deferred). For later plans, the value of the AVC cannot be taken into account in calculating the maximum tax-free cash sum.
Stakeholder therefore brings definite flexibility benefits.
An employer does need not know about a stakeholder plan, because the individual's income is self-certified. There is no similar confidentiality for AVC benefits, although the employer will know about the FSAVC arrangement, albeit they will not all the details. This may be important to some people, for example if they are funding to retire early but do not want their employer to know.
Other possible issues
Stakeholder charges are capped at 1% of the fund each year. This is lower than the cost of many FSAVC arrangements, but may be more expensive than an in-house AVC. A comparison of charges is essential if stakeholder is recommended.
Some AVC schemes may have a more limited investment choice than stakeholder or personal pensions. This may be an issue for some clients.
On the other hand, although employers cannot contribute directly to an AVC arrangement some may agree to pay more into the main scheme if employees make AVC provision.
Making the choice
Those topping up their pensions should first establish what options are available. Those earning under £30,000 a year who are not controlling directors have access to all three types of pension, but in practice FSAVC is unlikely to be appropriate. For higher earners who are not controlling directors, the choice is between AVC and FSAVC, while controlling directors can only have AVC.
The options then need to be considered carefully. In particular, a good understanding of the rules of the AVC scheme is essential in any comparison.
Finally, the adviser will consider options that are not approved pension arrangements. These may include Individual Savings Accounts (with greater flexibility, but no tax relief on contributions), and for high earners funded unapproved retirement benefits schemes (FURBS).
Although the advent of stakeholder (or, more specifically, the partial concurrency rules applying to personal and stakeholder pensions) will undoubtedly reduce take-up of AVC and FSAVC, both are likely to have a continuing place in the recommendations of IFAs.
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