I currently save for retirement with a personal pension plan. However, I understand that, in April 2001, the Government is introducing a new plan called the stakeholder and that this will be cheaper and better than a personal pension.
My concern is that, if I transfer my personal pension into the new stakeholder plan, it will cost money. What should I do?
The Government produced a Green Paper, A New Contract for Welfare – Partnership in Pensions, in December 1998.
This broadly describes the shape that stakeholder pensions will take when they are introduced in April 2001.
The details have not yet been finalised and much of what you will read and hear is speculation. However, it is important not to ignore the potential impact of the stakeholder on the way you are saving for retirement.
Essentially, stakeholder pension arrangements are aimed at employees earning between £9,000 and £18,500 a year. This target market has been identified by the Government because a significant proportion of them are “non-pensioned”, that is, they make no provision for retirement other than via the state pension scheme.
If you are self-employed, as things stand, you may or may not have access in the future to a stakeholder plan.
The Green Paper invites comments on whether self-employed people should be included in the new regime. Currently, half of self-employed people make no provision for retirement and it is doubtful that the introduction of the stakeholder will change that.
The proposed stakeholder pension looks very much like a personal pension plan but with some important differences. It will certainly be a money-purchase plan – just like personal pensions – in that you will build up a fund for the future by investing your contributions and possibly those of an employer.
This fund will be used to provide retirement benefits made up of a tax-free cash lump sum and an income payable to you, and possibly a surviving spouse, for as long as you live.
Most people purchase this income for life using an ann uity. This is the method curr ently used by personal pension planholders. However, at present, annuity rates seem pretty poor value for money as they depend greatly upon interest rates.
Unfortunately, the stakeholder does not deal with this dilemma. Where the stakeholder does differ from personal pensions is that the former will be Catmarked. This means they will have to conform to Government standards on charges, access and terms.
Catmarks are being introduced because the Government has been concerned that personal pensions are expensive and have not been properly sold.
However, modern personal pension plans are very cost-competitive and there are robust processes in place in most advisory firms to ensure charges are properly represented. It may be that the charges for stakeholder plans are lower than those for personal pensions but this in itself does not make them better. It is a combination of low charges and good investment performance that results in the biggest fund of money at retirement. Please don't confuse cheap with best.
One item to consider is the limit on contributions towards your retirement fund. It is proposed that the maximum contribution to a stakeholder plan is £3,600 a year. For a 36-year-old earning £40,000 a year and wishing to pay the maximum towards retirement, a personal pension contribution of £8,000 a year is allowed.
Some commentators have suggested that stakeholder pensions can be topped up with a personal pension but, actually, this is not the case. So, for higher earners or older individuals wishing to put their maximum contributions into pensions, the personal pension looks the best option.
When stakeholder pensions are introduced, you will have a number of choices. You will certainly be able to continue saving with your personal pension plan.
Alternatively, you might decide to cease contributions to your personal pension and make the plan paid-up. This is often a better alternative to transferring. Or you might transfer to a stakeholder plan, which seems to be the preferred route described in the Green Paper.
Be careful. Transferring is often not the best thing to do. Between now and the introduction of the stakeholder, the best thing to do will be to keep paying into your personal pension plan.
This is particularly true if you have a modern plan which offers both good short-term (transfer) and good long-term (paid-up) values.
We will be able to help you decide what to do when the time comes.