Stakeholder pensions are really here now after all the hype, massive investment and the job losses in the industry. As the industry takes heed of your advice that stakeholder is so simple there is no need for any advice. After all, a simple process of climbing about 14 decision trees will turn every one into an expert.
Decision Trees are the way forward then, which is obviously the reason why nearly all the remaining direct salesforces have been terminated with the loss of 10,000 jobs or more. That is more than all the job losses at Corus. It is strange to think that a Labour Government could have been instrumental in the termination of The Man from the Pru.
What is stranger is that other ministerial pronounce-ments have referred to advice being given. Pensions minister Jeff Rooker is on record as saying that advisers should get on out there as “mother knows best'' and “stop walking in the other side of the road”, to use his words.
It has been claimed by the Treasury that the charges do allow for a reasonable commission to be paid by providers to advisers, so why are you so adamant that most policies should be sold without advice?
You know, a charge of 1 per cent a year of the fund is going to allow IFAs to have some income from providing advice. Several providers offer commission of about 2.5 times monthly contributions. So a person investing, say, £70 per month, (the average currently invested in a personal pension), I will receive about £160 commission plus a small annual commission for looking after then in the future.
I can live with that, especially as you are so confident that stakeholder sales are going so be great that I will make up on volume what I lose on the higher commission which was available on personal pensions.
So you see it is possible to have stakeholder with the real benefit of advice, so why are you and your Treasury mandarins so anti-advice?
Now I want to tell you why you are so wrong about advice being unnecessary.
It must be decided if it is better to transfer all the present fund now in a personal pension into a stakeholder. Where there is an existing plan with one of the dozens of companies closed to new business not able to offer a stakeholder alternative, what advice would you give to a potential client if you were an authorised financial adviser?
Would you suggest starting a new stakeholder or would it be better to continuing to fund the existing one? Is the answer in your magic forest of trees?
Did you know for example that, in some cases, personal pensions have lower ongoing charges than stakeholder?
As it seems you are anxious that stakeholder is available in the high street, may I ask how one gets assistance from a bank's salesperson who will not be authorised to advise on existing pension plans?.
The problem will be aggravated if the Treasury's preferred option of scrapping polarisation and introducing multi-ties is introduced.
The problem is not made easier by the fact that one very big high-street Bank controls many closed pension funds, despite being anxious to sell stakeholder plans provided by the life company that it bought last year. I do wonder how they will address the issue of customers in their closed fund who may be considering buying a new stakeholder from this newly purchased life company with the old established, trusted name.
AVCs are another factor in the advice equation. Do we advise clients to continue with their AVCs when they cannot obtain tax-free cash from them? If we advise a stakeholder instead, are we faced with a risk that the Treasury will later allow tax-free cash from an AVC? It would be helpful if we had some guidance now.
Potential clients for whom the decision is very easy and the trees should work beautifully, is where the client is really wealthy and has a clutch of young children and perhaps a non-working spouse who can benefit from the lovely tax breaks that you have provided by not linking stakeholder to that wretched old Inland Revenue demand that you had to have net relevant earnings to be permitted to fund a pension.
The fact that we can now offer wealthy clients a pension plan offering £3,600 of investment for only £2,808 of contributions is a wonderful idea. With Isas, this means our wealthy family of a couple and two children can now tax-shelter £24,800 annually plus, of course, the 16-year-olds can do an Isa as well.
But what about the workers? I am worried about what to say to the person who calls into my office earning £12,000 a year. How can I advise them?
I have to tell them that if they are thinking of investing your minimum of £20, the capital sum which they will build up will then effectively suffer a tax of 40 per cent when they come to draw the fund as income.
This is because the minimum income guarantee proposals are likely to reduce state benefit entitlement, creating an effective tax charge of 40 per cent. Furthermore, the investments in the fund are now subject to the 20 per cent dividend tax introduced four years ago.
Did you know that it is reckoned that the dividend tax on pension funds costs about £5bn each year so the average pension fund needs about 10 per cent of extra funding each year to make up for it.
If you invest in an Isa, think of the advantages. Only 10 per cent, not 20 per cent dividend tax, no tax on the proceeds of the investment, whenever you want it. It is accessible at any time you need the money, unlike a pension fund. There is no tax in retirement on Isa savings unlike the taxable income on pensions.
With a pension if you die early, you would turn in your grave at the thought of all that annuity money lost to the life insurance company who make so much profit out of these compulsory purchase annuities.
So who do you feel is really the target market for stakeholder? Surely they are designed for higher-rate taxpayers who will be lower-rate taxpayers in retirement, those with no relevant earnings now but who may not be higher rate tax payers in retirement. Those who intend to retire to a tax haven and transfer their pension funds abroad to a more benign tax environment. Those who want to use IHT planning advantage of funding the children.
How will you quantify stakeholder success? I suggest that the only yardstick will be the total amount of annual new investment into pension plans. Why do I say this? Well, I am worried. I fear that employers now have the perfect excuse to wind up their defined-benefit schemes. Look at the dreadful cost to everyone.
I fear that the total amount invested in pensions may not rise at all, If that is the case, then I have to say that all this exercise was all for nothing Think how much easier it would have been just to tweak the features on personal pensions and ban the unfair terms which existed on some of them and to have modified the net relevant earnings rules. Just think how much easier and cheaper it would have been.
Well it is too late now, the die is cast. But please do say why you do not want the involvement of professional financial advisers in the distribution of stakeholder.
Troy French and Partners