Stakeholder is set to revolutionise pensions. Everyone will save and everyone will contribute to a group scheme which leaves very little room for IFAs to earn a living – and big brother will be watch-ing you.
But, as with big brother, there will always be those who do not fit into the Government-prescribed mould and those individuals who want more than stakeholder can offer.
As the rules stand, very few stakeholder pensions will be able to offer with-profits investment or external fund links and none will be able to offer waiver of premium or life cover within the contract.
It comes back to the 90/10 rule, 90 per cent of the people will be satisfied with stakeholder and 10 per cent will not. This is where IFAs can make their money.
There is no doubt that stakeholder will eat up the majority of the corporate market. Research by Mintel for CGU shows 49 per cent of employees would contribute to a stakeholder pension if their employer offered one.
But there are lots of opportunities to sell to individuals until the introduction of stakeholder and once it has arrived.
Personal pensions and self- invested personal pensions taken out before the April deadline next year will benefit from the existing rules on risk contracts.
This means waiver of premium costs will be paid net of tax and a gross benefit will be paid. Policies taken out from April next year will not get tax relief on waiver of contribution premiums.
But its not just waiver of premium that clients can benefit from by taking out policies now rather than next year.
One of the great things about pensions has always been the ability to provide cheap, tax-relievable life cover. But, from next year, the rules for personal pensions and stakeholder will be brought into line, meaning the 5 per cent of contribution which is currently allowed to pay for life cover will drop substantially.
The new regulations state that only 10 per cent of the contribution can be used to pay for cover. But policies taken out before then will be able to start and keep the 5 per cent of premium benefits.
There is even some legal opinion which suggests a policy taken out now will keep the right to improved life cover benefits even if the option is not taken up immediately.
Even without the risk benefits, personal pensions stand apart from stakeholder and will continue to do so. The ability to invest in with-profits is guaranteed. The Government has moved from its original stance on ringfencing with-profits funds for stakeholder as it is unworkable.
It is now proposing separate accounting procedures for stakeholder with-profits but there is still a question mark over how many providers can or will go down this route.
Access to external fund managers is also guaranteed with some personal pensions whereas the margins in stakeholder make this altogether less likely.
The more sophisticated investor will demand this when you consider the performance figures. According to Standard & Poor's Micropal, over the last five years to July 31, the Fidelity pension managed fund available through Skandia has returned 91.75 per cent and Standard Life's pension managed fund 64.84 per cent.
Even when you have worked through the risk and potential performance advantages of personal pensions over stakeholder, you still have executive pension plans and small self-administered schemes which can be used to fund a small business and cut tax bills, not to mention improve pension benefits.
A small company taking out an EPP can borrow back 25 per cent of the fund in the first two years and 50 per cent after that. The benefits have the potential to be much greater than anything you can get in a stakeholder.
The maximum tax-free cash from an EPP is one-and-a-half times salary. From a stakeholder, it is 25 per cent of the fund. Members can also make up for lost years in an EPP funding for previous years' service when they did not have a pension.
For a stakeholder and personal pension, it will only be possible to use the previous years' allowances if you want to top up your pension.
But it does not need to be that complicated to make money from individuals under the new regime. There are plenty of opportunities to sell stakeholder to individuals. Rules brought in by the Government mean the free-standing additional voluntary contribution has effectively been replaced by stakeholder.
Anyone who earns £30,000 or less and is currently a member of an occupational scheme will also be eligible to top up their benefits through a stakeholder. Inland Revenue fig-ures put this market at a potential eight million employees and, while it is not a new market, it is certainly one which will become more aware of the options because of the Government drive behind stakeholder.
Combine this with the increased saleability of stakeholder as a top-up vehicle. Tax- free cash can be taken from a stakeholder whereas AVC savings could only be taken as income and there is lots of potential to sell stakeholder to individuals within groups and maybe get the company to pay you a fee for doing so.
Whatever the challenges stakeholder throws up, IFAs are in a great position to deal with them as well as advising on the issues and helping people make the right decisions. It should be embraced as an opportunity, not seen as a threat.