The Government's pension credits scheme pledges that pensioners will always benefit by saving but the industry is querying whether pensions are the best investment vehicle for everyone.
An increase in the minimum inc ome guarantee and the introduction of pension credits provides more encouragement for people to save through pensions. The industry agrees that these improvements will benefit those already retired but what about younger people who are just starting to consider saving for their future?
Stakeholder pensions will be offered to many people who do not have access to a company pension. It is likely that those taking home less than £67 a week who are offered a pension will not seek financial advice but instead use a decision tree.
Since stakeholder does not req uire employers to make any contribution to their schemes, there is a real poss ibility that low earners will contribute to a stakeholder with no additional contribution and will not realise there might be better methods of saving.
Scottish Equitable director of pensions development Stewart Rit chie says the tax relief given by the pension cre dit scheme might not be as much of a ben efit as paying into an Isa each year. Those qualifying for pension credits will get 60p per pound whereas the money comes out of an Isa £ for pound.
Ritchie says: “Instead of having a pension, an Isa is money that would be available as rainy-day money that is 100 per cent tax-free and you do not have to pay tax on threequarters of it. Many people could use up these savings before they get close to means testing on retirement.”
Legal & General pension strat egy director Adrian Boulding says the difference between saving through a pension or Isa is a moot point.
He says: “People can look at their individual circumstances and see which savings route is best for them. The Isa is already a popular vehicle for retirement savings.”
The introduction of pension cre dits will benefit the industry because it removes any risk of low earners buying a stakeholder pension only to discover on retirement that they would have been better off not saving at all. Pension credits mean when people put money into a pension, providers can put their hand on their heart and say low earners will benefit from saving when they retire.
Before making such promises, however, provid ers need assurances from the Government that pension credits will come into effect. It is not due to start until 2003, yet people can start buying stakeholder from April 2001 and there will be a general election bet ween these dates. Rit chie says providers need a statement from the FSA to say they can assume pension credits will happen.
He says: “If this does not happen, then stakeholder can easily be undermined bef ore it even starts. If we do not get this assur ance, then the industry is putting its neck on the chopping block again on pensions.
“Nobody wants low earners to pay into a scheme where they are not sure that the investor will benefit and so for that reason I welcome the pension credits but I would equ ally welcome a clear statement from the FSA that we are entitled to assume pension credit will happen.”
Assuming pension credits are made law, it should improve the current pension situation by protecting providers and savers from the risk of misbuying pensions.
However, savers are still be let down by the Government's failure to provide effective advice. Decision trees do not clearly point out the option of Isas and, if stakeholder is the only vehicle being offered to them, why would people look any further?