Stakeholder is almost a kitemarked product which is so simple and straightforward that it sells itself, aided by easy-to-use decision trees which answer almost all the questions any eligible investor might dream up. Dream on, more like.
Because stakeholder does not replace an older product, the complexity facing potential purchasers has increased. Not only must they come to grips with stakeholder but also the alternatives that are available, such as Isas, venture capital trusts, enterprise investment schemes and even “ordinary” stockmarket-based investments using their annual capital gains tax allowances.
Like other pensions, stakeholder offers attractive tax relief on contributions, NIC savings on employer contributions, tax-privileged growth and the possibility of tax-free cash although the benefit of the latter two looks like being reduced over time.
Unlike an American 401(k) plan, access to your own money is impossible until at least age 50 (if the Government doesn't raise it to 55). You must draw your fund by 75 (which could also change – for the better) by buying some form of annuity, which remains something of a lottery given the uncertainty surrounding interest rates and possible euro membership.
Shares from an approved employee share scheme can, within the contribution limits, be put into stakeholder and attract tax relief. But you must make clients aware of the magnification of risk inherent in having their job and pension dependent on the same company. Stakeholder may also accept pension-splitting awards on divorce.
Waiver of premium cannot be added to stakeholder schemes and the allowable life insurance contribution, at 10 per cent of stakeholder premiums, is designed for maximum aggravation. Why not link it to the length of nasal hair and have done?
With the Government's new minimum income guarantee, stakeholder is effectively another sneaky euphemism for 100 per cent income tax because, apparently, the Mig benefit will be lost or gained pound for pound depending on the income produced by the pensioner's stakeholder although, to be fair, any other savings could have the same effect.
The removal of the ability to carry forward unused pension relief is a blow to many people who used spare cash in a well remunerated year to make good the deficiencies in their savings during the previous seven. Because the link between earnings and permitted stakeholder contribution levels is not as direct as with personal pensions and retirement annuity contracts, stakeholder helps to an extent, becoming certificated for five years at a time and always paid net of basic-rate tax. Contributions can continue until 75, even after retirement, initially based on final certificated earnings for five years before dropping to £3,600.
Provided the qualifying requirements are met, £3,600 can be contributed to stakeholder even if also in a “deemed defined-benefit scheme” (basically, any non-defined-contribution scheme) which can have an AVC. Otherwise, concurrency is restricted to members of DC schemes. This could sound the death knell for AVCs and, especially, the much-maligned FSAVC, neither of which allow tax-free cash. Many investors will prefer stakeholder but their enthusiasm may need to be tempered if the AVC is a good subsidised one.
Some industry wags are celebrating the fact that parents could contribute £3,600 a year to stakeholder plans as a tax-efficient way of saving for their children. Gee, thanks dad, that'll come in handy when I want my first Zimmer frame in only 50 years time.
Michael Both is a partner at Michael Phillips