Mirror, mirror on the wall which is the fairest pension of them all? The existence of a single tax r...
Mirror, mirror on the wall which is the fairest pension of them all? The existence of a single tax regime for defined contribution pension schemes means that from 6 April 2001 investors must choose between investing in a personal pension or a stakeholder pension scheme. As a single tax regime means that both products qualify for the same tax benefits, the only direct material difference between these products will be charges and investment opportunities.
Although most coverage of stakeholder pensions has tried to convince IFAs that price is everything, the reality is that suitability will depend on other factors as well. The DSS recognised this in the early stages of consultation on stakeholder pensions.
Its comments in Consultation Paper No 1 told us that product suitability should take account of investment as well as price issues. "All schemes registered as stakeholder pension schemes will need to meet the minimum standards.
"But meeting the minimum standards will not by itself ensure that any stakeholder pensions scheme will be the best pension option for everyone. Minimum standards will not offer a guarantee of performance or suitability."
This was repeated recently in the guide to stakeholder pension schemes the DSS produced and mailed to employers. "A stakeholder pension is just one of the pension options available, but there may be another option that suits the individual better."
These statements suggest that stakeholder pensions are limited and that personal pensions could be more suitable. This possibility arises because the stakeholder charge limits are negative for investors who recognise how important first-class investment returns are and want independent advice but do not want to pay fees. The charge limits could have two significant drawbacks.
l The quality and availability of investment advice will decrease if commission is lower.
l The potential for achieving good investment returns will reduce if stakeholder products provide limited fund choices.
Although views will vary, a stakeholder product that covers its costs cannot afford to spend more than 0.6% pa on fund management and commission. If we assume that IFAs will need at least 0.3%pa fund-based commission, this leaves just 0.3% pa for fund management.
Therefore, if a stakeholder product excluded funds falling outside this limit it would exclude almost every actively managed fund in the UK market. This suggests that, provided a personal pension offers investment opportunities that are not available within stakeholder pensions, there will continue to be investors and IFAs that recognise the benefits of wider investment choice.
Rather than handicap personal pension sales, the absence of charge limits should be a big advantage. After all, it will mean that personal pensions can provide unrestricted investment choice and adequately remunerate investment advice. This provides multi-manager personal pensions with an advantage in attracting clients who want to achieve the best possible investment returns.
Personal pensions can provide a clear, value oriented alternative, provided any extra cost directly relates to investment advice and fund management. This will be important for IFAs now the FSA's Rule Notice 53 has signalled that advisers must explain in their reasons why letter why any personal pension they recommend is at least as suitable as a stakeholder pension.
This requirement is causing much head scratching. It means that IFAs must work out which personal pensions they can recommend. At the same time, providers that are developing stakeholder products that mirror their personal pension product in all areas except commission may now be wondering what to do with their personal pension products on 6 April 2001. This is simply because IFAs will have a mountain to climb if they are to recommend a personal pension if a stakeholder product provides the same benefits at a lower price.
This is simply because IFAs will have a mountain to climb if they are to recommend a personal pension if a stakeholder product provides the same benefits at a lower price.
Although IFAs could justify higher charges if they are necessary to cover advice costs, they will need to highlight this in the "reasons why" letter. This would be difficult to handle with many clients and would alert astute clients to the possibility the same product is available direct at a cheaper price.
These developments increasingly suggest that multi-manager personal pensions and Sipps are in a strong position to dominate the individual defined contribution pension market after 6 April 2001. This is becoming more likely now that it looks like the stakeholder players with the most orphan assets have decided to raise the stakes by driving stakeholder prices even lower than 1%.
Lower stakeholder prices can only mean that investment opportunities and commission will come under even more pressure and that the reasons for not investing in stakeholder pensions will become even clearer to an increasingly dismayed IFA market.
Peter Jordan is head of pensions marketing at Skandia Life
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