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Cat among the pensions

Last week, the Government unveiled its latest weapon in the propaganda machine that is stakeholder pensions.

It slammed personal pensions, saying they were bad value for basic-rate taxpayers and put forward Catmarked Isas as a suitable alternative.

The report, Saving for Retirement – how taxes and charges affect choice, released by the FSA also says the capping of charges on stakeholder pensions could be an important step in persuading people to save.

FSA central policy economics of financial regulation department head Paul Johnson says: “For many people, the tax system is an inadequate incentive to save for retirement through a personal pension. For a basic -rate taxpayer, the tax advantages of personal pensions can be more than offset by high charges and lack of flexibility, especially relative to a Cat Isa.”

Scottish Mutual pension development director Leslie Gray says the negligible tax differences give no incentive for people to save for retirement.

“There is not a great difference between the two in terms of tax benefits. With a pension, people will be worried about locking away their money for 30 years and, if the Government is serious about making people save for their retirement, it should be making pensions much more attractive than Isas,” he says.

The FSA&#39s research shows the end-result for a person who invests in a pension and does not take a lump sum is exactly the same as an Isa.

Scottish Amicable director of pensions development John Glendinning says: “The only real break for a personal pension over an Isa is the tax-free cash.”

According to FSA figures, this tax-free advantage ona pension is only 7 per cent and investors pay for this by the reduced flexibility of a pension.

Gray says the only way to make people save for their retirement is to make it demonstrably more attractive than the alternatives. “One thing they could do is allow access to the pension fund. There is already a model for this in the States, wherepeople can get at their money in times of hardship or through a loan,” he says.

Glendinning agrees action is necessary. “There is a real need to get people to lock in their savings for 30 to 40 years,” he says.

Johnson says: “The advent of stakeholder pensions represents a new approach anda very important weapon inthe Government armoury in providing a real incentive for retirement savings.”

But the tax treatment of stakeholder is the same as personal pensions. The only difference is on fees for advice. For a personal pension, fees are included in the contract but stakeholder clients are expected to pay an up-front fee.

The report says: “The Government proposes that product providers and advi- sers should be able to charge an investor a separate up-front fee on top of the 1 per cent per annum maximum charge if the investor wants a personalised service.”

Glendinning says: “It is going to be very difficult because the majority of consumers in the target market will be reluctant to pay fees. It may be that one option is to go into a personal pension and have the advice cost charged against the personal pensions.”

That is exactly what the FSA has attacked in its report. Its figures show that a 25-year return on a personal pension contribution of 60 a month is 35,900 for one of the highest-charging contracts, 40,300 for one of the most competitively charged contracts and 40,392 for stakeholder pensions.

These figures appear to present a compelling argument until you consider the uncertainty surrounding pension provision for the future.

Glendinning says the debate around the minimum income guarantee and surveys like the FSA&#39s prove people cannot be left to make important pension decisions on their own. “These are issues which need to be thought through for consumers. It really does highlight the need for consumers to get a wealth of information and be able to access advice,” he says.

At present, the basic state pension is 67 a week and the Mig is 78.40. This means someone who has no further income or savings will get an extra 11.40 a week from the Government. But someone who has saved and receives a private pension of 12 a week or has savings of more than 8,000 will get nothing extra from the Government.

This is hardly an incentive for the low-paid to save. DBS research technical manager Nigel Hemingway says until this is resolved it is impossible to calculate whether someone would be better off saving in an Isa, a pension or spending the money now. He says: “Lower-rate and basic-rate taxpayers really should not be funding pensions at all. You need to know what the state benefits are before you can advise anyone on their pension savings. Various smo-kescreens are coming out but until they resolvethat, anything you say about pensions is a waste of time.”

Aifa director of policy and technical services Fay Goddard says: “It is very difficult to advise on pensions. A lot of IFAs will say, don&#39t worry about it. Do an Isa, then blow the money on a trip round the world and rely on the state.”

But Legal & General pensions strategy director Adrian Boulding disagrees. He says: “The issue about the Mig is a red herring. The Mig is the level of abject poverty and stakeholder is a ladder of opportunity to help people climb out of abject poverty.

“What its level will be will be up to future Governments and I do not believe you can do any accurate calculations to see who will and who will not lose out.”

He admits the issues do need resolving. “Gordon Brown has recognised the problem and promised in the next administration to make sure that people who save will not be penalised,” he says.

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