View more on these topics

Dates with destiny

On April 6, 2001 consumers who currently contribute to personal pension

plan arr^_angements will have an important decision to make. They will

require independent fin^_ancial advice to ensure they make the correct

decision. The question they will seek the answer to
is: “Should I stop

contributing to my
personal pension and start contributing to a

stakeholder pension arrangement?”

In theory, this should be an easy decision to make but in practice it will

not be. Consumers will be faced with information overload. They will be

inundated with newspaper articles, messages from their personal pension

pro^_vider, internet sites and decision trees and, unfortunately, none of

this will enable them to conclude what best to do. Proper financial advice,

as we all know, can only ever be personal to an individual. Generic advice

is the most dangerous form of advice.

Unless each personal pension planholder examines all the options available

before making a decision, then we run the risk of storing up another

misselling or misbuying scandal. This article does not look at individuals

who have made no previous pension provision, they might well be best served

by joining a stakeholder pension plan. Instead, I aim to look at the

choices and options available to the existing personal pension planholder.

What should they consider, come
April 2001?

The choices for the personal pension planholder include:

Opting to continue to pay into the existing personal pension plan.

Stopping contributions to the personal pension (making it paid up) and

starting a stakeholder plan.

Making contributions to a stakeholder plan and transferring the personal

pension fund.

Stopping contributions to the personal pension and redirecting savings to

another savings vehicle, for example, an Isa.

Stopping contributions to the personal pension plan and doing nothing.

Individuals without a personal pension plan at April 2001 have a simpler

choice. They need to decide whether to build up a stakeholder fund or

simply rely on state benefits for their retirement needs.

While the latter route is fraught with danger, it is perfectly

understandable, given that building a small pension fund could be very

cost-ineffective if it prevents the pension fund owner from claim^_ing a

better level of state benefit.

One of the attractions of stakeholder pensions is their perceived low

level of fees – no more than 1 per cent annual management charge, ignoring

any additional fees for advice.

But what if it is actually cheaper to continue paying into your personal

plan than to start paying into a stakeholder?

In some inst^_ances, continuing to pay into an existing personal pension

plan will be cheaper than stopping and redirecting contributions to

stakeholder. There is a need to look at the reduction-in-yield figures, as

demonstra^_ted in the table opposite.

Clearly, for some clients, best advice will be to keep the plan going. Bad

advice will
be to stop and buy a more expensive stakeholder plan.

Why might someone for whom personal pension contributions are cheaper,

stop paying and buy a more expensive stakeholder plan?

It might simply be that they mistakenly look at the headline charges and

come to the wrong conclusion.

It is not always best to transfer from one money-purchase

arr^_an^_g^_ement to another. At the very least, the exit cost of a

transfer out, the entry of the replacement plan and future possible

investment ret^_urns of both the original plan and rep^_lacement plan need

be considered.

Some personal pension plan products offer better paid-up values than

others. Sun Life, for example, has been marketing a plan for some time with

paid-up values at retirement relatively poor transfer


This makes a great deal of sense because by far the majority of personal

pension planholders do not transfer their plan values. Most planholders

simply make their plans paid up.

Care needs to be exercised here, however, because some paid-up plans are ve

ry poor value for money. In the most extreme cases, we have identified some

paid-up plans which totally erode the future fund value by having high

on^_going charges.

Where the paid-up plan value is good and the ongoing costs, as measured by

RIY, are high, it might make sense to make the personal pension paid up and

start a stakeholder but definitely not to transfer the existing fund to the

stakeholder plan.

Where paid-up values are poor and transfer values good, this might make

sense if the ongoing cost of a personal pension is higher than that of

stakeholder. If it is with the same provider and some “stakeholder

guarantee” has been offered, then it might represent good value.

Remember there is no guarantee that the future performance of

chosen stakeholder plan will be better than the future performance

of the
personal pension plan.

It may be that an investor for retirement is fed up with talk of costs and

disturbed by the poor relative value of annuity rates.

Capital control may be a priority. Perhaps a personal pension or

stakeholder is the wrong solution in any event.

Some investors for retirement may be prepared to trade off tax relief on

contributions in return for capital control, freedom of choice and


Stakeholder pensions, just like
personal pensions, will allow a

free cash lump sum payment to be taken and offer an income-drawdown

facility but, frankly, for the vast majority of planholders, this route

will not
be acceptable.

Another alternative is to stop
contributing to the personal pension

plan and do nothing.

This is not as bizarre as it might sound at first. Those who

heartedly save for retirement or produce a fund which deprives

them of state benefits might feel they were poorly advised to do something

the first place.

However, it is essential that bef^_ore stopping a personal plan and

starting a stakeholder plan, the personal pension planholder considers all

the options available and takes appropriate independent advice.


NPI fund charges to be based on performance

Pension provider NPI is the first life office to base external fundmanagers&#39 charges on performance.The company believes one way IFAs can fight back in the post-stakeholdermarket is to offer external fund management links on its pensions. It isalso making the fund links open to all its new and existing customers.NPI says it whittled its choice […]

Chelsea and Skipton set to vote for mutuality

Chelsea and Skipton buil-ding society members are expected to voteoverwhelmingly in favour of mutuality, according to sources closetoboth lenders.The two societies are holding AGMs this week amid ongoing battles againstcarpetbaggers.Nearly 90 per cent of Chelsea voters are expected to vote for thethree pro-mut^_ual directors while Skip^_ton members are expected to vote in similar proportions in […]

Fortunes and rates can fluctuate

Thanks, Money Marketing for letting me outline my views on endowmentmortgages in more depth. The letters page can only allow a good knockabouton complex subjects and I trust that David Playfair and Peter Knight willaccept that my comments are nothing personal – like the politics you get atPrime Minister&#39s question time compared with the real […]

IFAs fear life office powers in ABI scheme

IFAs fear that life offices could become judge, jury and executioner inthe way they conduct their business under the latest proposals from theABI.The proposals, part of the ABI&#39s Savings and Long Term Risk adviceaccreditation project, suggest life offices will be able to take actionagainst individual IFAs if they believe the way the adviser conductsbusiness threatens […]

Keep calm and carry on?

We British are known for our stiff upper lip and just getting on with things. It’s part of our quirky cultural behaviour – like forming orderly queues, or saying sorry when it’s not our fault. Many of us just aren’t that great at talking about what’s bothering us. But if someone feels that the stresses […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm