“While financial advice can be valuable, it is not a necessary condition for all savings and investments that are suited to people's individual needs and circumstances. For example, Catmarked products and stakeholder pensions are products whose standards mean that investors should be able to get a good deal without needing to pay for financial advice.” – Treasury economic secretary Melanie Johnson.
This quote is taken from a letter that was publicised in Money Marketing. Following hard on the heels on the announcement that stakeholder pensions can be sold outside the current polarisation regime, IFAs should be in no doubt as to the Government's agenda. It is desperate for stakeholder pensions to work even if this means they are flogged on the high street without any advice at all.
This thought should be enough to frighten the life out of anyone who understands the complex nature of pensions. Although some aspects have been simplified by the new regime, the overall structure is still incredibly complex. There is a wide range of issues that will not be covered by decision trees. For example:
What impact will the proposed contribution have on the minimum income guarantee?
Should all the investor's pension arrangements be considered?
Should the contribution be carried back and should it be used to mop up any remaining unused relief?
For those wanting to contribute the maximum, can they utilise earnings in the last five years to achieve higher contributions?
Do existing AVC arrangements give entitlement to tax-free cash?
Should the investor contract out?
Do older investors understand the implications of investing for a short period and buying an annuity when rates are at historically low levels?
Has the tax position of both spouses been evaluated?
Would the investor be better off using an existing personal pension for life cover and incapacity benefits?
Do the default fund and any associated lifestyle options make sense?
Should the investor use an Isa instead?
Does the stakeholder pension provide good value relative to personal pensions?
Although the low income and low premium end of the market will not be affected by many of these issues and may be able to get by without any advice, the vast majority of people who will take out a stakeholder or personal pension will need advice on these issues. The potential for misbuying is enormous. This will be complicated because most investors will probably believe they have received advice unless hawkers of stakeholder pensions are required to declare verbally and in writing that they have not provided any advice.
Some idea of the problems that can arise can be gleaned from the fallout that followed the last Government-inspired “sign 'em up” campaign that followed the introduction of personal pensions in 1988. Apart from the problems associated with opt-outs and transfers, considerable problems still persist with many contracted-out cases.
Back in the 1980s, the irresistible combination of the 2 per cent incentive payment, annuity rate assumptions based on 10 per cent interest, single-premium charges and reversionary bonus rates of over 12 per cent meant that advice was in many respects simpler than it will be for stakeholder pensions.
As a result, males aged under 45 and females aged under 40 were signed up en masse into with-profits arrangements, secure in the belief that the odds in their favour were so good that they could not possibly lose out.
Since then, gilt yields and with-profits reversionary bonus rates have collapsed to such an extent that anyone who used a with-profits personal pension to contract out may now be struggling to beat Serps. This represents the best possible example of why investors will always need advice, irrespective of how good the structure of a product may appear.
Against this sort of background and the lacklustre performance of Cat-standard Isas, one is left wondering why the Government and the FSA are making it so easy to sell stakeholder pensions. One thought that comes to mind is that the Government may simply be reacting to the lead it is getting from those companies which have staked their whole pension strategy on stakeholder pensions. This could explain why Cat-standard Isas, where there are relatively few advice issues, were not treated in the same way as stakeholder pensions.
If anything, there was a stronger case for leaving stakeholder pensions within the polarisation regime than Cat-standard Isas. A cynic might argue that the actual decision had little to do with providing a secure framework and more to do with doing what the distributors asked for. After all, Autif was against any change for Cat-standard Isas while the banking arm of the ABI was in favour of taking stakeholder pensions out of polarisation.
Having said that, maybe Johnson is doing IFAs a favour in providing a subtle hint to anyone requiring advice – if you want advice, then a stakeholder pension is the wrong place to find it.
Now that policy fees and exit charges have disappeared from the personal pension scene, comparisons between stakeholder and personal pensions are very similar to the Catmarked and non-Catmarked Isa position. This being the case, it is difficult to see why any IFA should be concerned by comments such as these. After all, they do not have to use stakeholder pensions and the PIA has set out the rules for recommending personal pensions.
All IFAs have to do is to justify that any personal pension recommendation is at least as suitable as a stakeholder pension.
It is that simple. They must simply make sure they recommend personal pensions that are clearly differentiated from and add real value above that provided by stakeholder pensions. Let the defections begin.