To paraphrase Alex Ferguson: There is no question stakeholder pensions are here to stay. And there's...
To paraphrase Alex Ferguson: There is no question stakeholder pensions are here to stay. And there's also no question it will signal the demise of the GPP. The effect on all other forms of savings products will be dramatic - whether these are pensions or other forms of savings. The only thing clear is that everything must change.
The normal reaction to even an evolutionary change - let alone a step change of this nature - is to resist and try to hold on to the familiar. And yet to quote Charles Darwin: "It is not the strongest of the species that survive, nor the most intelligent but the most responsive to change."
This is as true of an IFA as it is of a life office or anyone else. So in this changing world what should the consumer do, or more importantly, what should an IFA advise his clients? Wait for Stakeholder, when everything will become clear, or do something now?
Some things just do not stand still. However, though change is in the air it is not true of the most basic principle associated with an individual's need to start saving for retirement. The sooner a member starts saving, the greater the likely outcome. Employers and individuals alike simply cannot afford to sit on the fence and delay with their pensions planning.
If a man had taken out a pension last November he would have to pay in £648 a year until retirement to receive a pension of £5,000. If he was to delay his decision until April 2001 when Stakeholder is due to be launched, it would cost him an extra £68 per year, that is 10% pa more, to achieve the same level of benefits.
So a delay is not good advice. It is important that all of us start to save today, rather than later in our working life.
The Government has made it clear that "people expecting to retire on the state benefits will face poverty", but most people do not realise that they may not even be entitled to the full state basic pension. With people spending more years in retirement than ever before, planning for the future is essential. Deferring the decision-making process is poor planning and not really an option.
The IFA needs to know
To give advice now, the IFA needs to understand the proposals for stakeholder schemes. This is to avoid setting up an arrangement which may require another change in 2001 or one which may penalise the customer.
The Government's objective is to encourage people, particularly those with modest incomes, to start to save or to save more for their retirement.
Taking account of the responses to the Green Paper, the Government has now refined its original proposals.
It now plans to introduce a single, integrated tax regime for all defined contribution (DC) pension schemes. DC schemes will include stakeholder pensions and personal pensions and the trustees of occupational money purchase schemes will have an option to transfer into the new regime is they so wish.
A stakeholder pension will therefore be a defined contribution (DC) pension scheme like a personal pension, but one which meets the specific conditions for stakeholder pensions (on, for example, charges and governance) set out in regulations under the Welfare Reform and Pensions Act.
The introduction of a single, integrated tax regime will remove the requirement for individuals with stakeholder pensions to switch to a personal pension should they wish to increase their level of contribution as would have been the case under the Government's original proposals.
This will save unnecessary costs and possible diminished returns as well as the need for advice on whether to contribute to an alternative investment, rather than switching to a personal pension.
The original ceiling for contributions to a stakeholder pension was set at £3,600 ,although this has now been scrapped. Contributions above £3,600 will now be made by reference to the existing personal pension age and earnings related limits (i.e. 17.5% of earnings up to age 35 rising to 40% for age 61 and over). Evidence of earnings would be of a similar standard to the existing personal pension requirements.
For contributions up to £3,600 per tax year, there will be no link between contributions and earnings. There is also no minimum age. The £3,600 limit will be reviewed periodically.
Abolishing the earnings link will mean that groups of people will now be able to start a pension, or continue contributing to one, in situations where they are currently prevented from doing so.
This will benefit, for example, carers, mature students, those on career breaks, plus the unemployed or recently divorced who may have a lump sum to put in a pension.
People will also be able to use savings or gifts received (for example from a partner, relative or a person being cared for) to build up their pension even though they have no earnings of their own.
Removing the minimum age requirement will allow parents to pay contributions of up to £3,600 (£2,272 net) a year into stakeholder schemes for their children. This could lead to the children never needing to contribute themselves towards their own retirement.
Higher tax relief
All contributions will be paid to the provider net of basic rate tax, whether the individual is employed, self-employed or not earning. The pension provider will reclaim basic rate tax from the Inland Revenue. Individuals getting any higher rate tax relief would do so through their self-assessment tax return.
Contributions above £3,600 can continue for five years after the year in which earnings cease. The upper limit will be based on the highest level of earnings in the previous five years. After five years, contributions will be limited to £3,600 each year.
What do customers want from pensions? They have been a turnoff for most people. Not only is it not an urgent topic but the complexity surrounding pensions is more than eno
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