The Financial Services Authority's decision to keep the RU64 rule could actually lead to mis-selling rather than preventing it, ahead of the introduction of personal accounts, claims EveryInvestor.
Chris Gilchrist, chief executive of the advice website, says the decision to keep the rule which requires advisers to explain to their customer why the personal pension product they have recommended is at least as suitable as a stakeholder pension, is an “absurdity” in the run-up to personal accounts and could promote mis-selling to a vulnerable group of low-income savers.
Although the FSA says the new scheme scheduled for introduction in 2012 will not affect the operation of RU64, Gilchrist warns the rule’s implicit backing for stakeholder could mean people end up saving in an unsuitable product.
He also warns the FSA's own 'decision trees' on stakeholder pensions are now also misleading as the government has stated savers will not be allowed to switch money from stakeholders to personal accounts in 2012.
Therefore, as the charges for stakeholder are 1.5% and personal accounts charges are expected to be around the 0.3% mark, EveryInvestor warns a “recommendation of a stakeholder pension to anyone who is eligible for a personal account in 2012 could result in a mis-selling claim against the adviser”.
Although the government proposals for personal accounts currently have a contribution cap of £10,000 in the first year and £5,000 for each year following, it makes it clear this is to help people boost their pension pot by transferring across any non-pension savings, such as those currently in Isa, as any transfers from an existing pension are forbidden over fears of levelling down.
Gilchrist also argues the result of this will be that most people starting a retirement savings plan now - who will also be eligible for a personal account in 2012 - should not be advised to start a stakeholder pension plan as this would require payment of much higher charges right up to retirement age.
It says, for example, someone saving £78 per month over the next five years in a low-cost index tracking fund and then transferring a lump sum into a personal account could end up with a fund worth £14,373 in 20 years' time which is around 17% more than the result of a £78 per month net contribution over five years in a stakeholder pension, which would be £12,247.
Gilchrist says the disadvantages of stakeholder's higher charges are now so significant the FSA should issue new guidance for consumers and advisers, and he suggests those wanting to save towards retirement now would be better off placing money in an ISA, as they will then be able to cash in the plans in 2012, transfer to a personal account and collect tax relief of up to £2,200 on a net contribution of £7,800.
He adds: "This is another example of the UK's disjointed pension policies. Stakeholder was never a cheap product and is now five times as expensive as personal accounts are expected to be. It cannot make sense for people without any retirement savings to make a lifetime commitment to stakeholder when a far superior savings product will soon be available.”
He suggest to prevent mis-selling, the FSA should ensure all advisers are aware of the government’s policy on personal accounts so they make appropriate recommendations, and at the same time it should revise the stakeholder decision trees which are used not only on the FSA website but on many other websites.
“By keeping RU64, with its implicit backing for stakeholder pensions, the FSA could encourage low-income savers to buy an unsuitable product,” Gilchrist adds.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7034 2681 or email [email protected]IFAonline
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