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
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
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
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
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
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
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
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
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.