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Opportunity or threat?

IFAs are resilient, tough-minded and very adaptable. That is just as well, given the new requirement to operate in the one per cent stakeholder world. The business proposition of independent advice is, however, the key ingredient. In my view, it will ensure that many IFAs will not only survive in this fast-changing environment, but prosper. Certainly they hold the moral high ground and have the qualified support of the media &#45 if only because the alternative of tied advice is not very palatable.
However, the focus of this article is on stakeholder and what it will do to IFAs. I think the answer to this depends on what kind of IFA we consider, the target markets they aim at, and the extent to which they rely on commission for remuneration. A useful distinction can be made, perhaps, between IFAs, corporate IFAs and employee benefit consultants.
IFAs who have a predominantly individual client bank will not get very far trying to sell stakeholder to those in the Government&#39s original target earnings sector of £10,000 &#45 £20,000 a year. The one per cent charge cap will ensure that relatively small amounts of commission will be generated, given the expected low contribution rates; and resistance to fees will be strong among this sector of the population. Most of these potential clients will have other financial priorities and carry overdrafts, credit card debts and car loans.
I think the Government has not fully appreciated that when advisers consider the suitability of a product, as they must, many will conclude that stakeholder is not the answer. The need to accumulate short-term, flexible savings will often take precedence. The continuing uncertainty regarding the interaction of stakeholder savings with the minimum income guarantee will make advisers extremely cautious &#45 and rightly so. They will therefore look at stakeholder&#39s application to those clients who have far greater net disposable income and lump sum assets. And here the opportunities are spectacular.
Before just touching on some of these, it is worth remembering that pre-stakeholder personal pensions offer IFAs interesting business opportunities. The obvious one is maximising carry-forward opportunities before their imminent removal. Significant single contributions will be made before April 6, 2001. Many individuals will also be encouraged to effect personal pension plans that carry the often more attractive and flexible waiver of premium and life assurance options. Most plans effected before April 6 will allow these benefits to be added in the future, using current rules, even if the client does not need them now.
Turning to individual stakeholder plans, it is not possible in this short article to do more than rehearse a few of the possibilities. Suffice to say that the ability of most to pay £3,600 a year, irrespective of earnings, together with being able to continue for five years any allowable contribution based on net relevant earnings will see some very significant tax-planning applications emerging.
One example would be where a self-employed individual decides to retire at 60 with no ongoing relevant
earnings, but some capital.
He could, if he wanted, contribute to a stakeholder pension up to £3,600 a year until the age of 75 and receive basic rate tax relief.
Consider also a 60-year-old newly-retired architect who has always maximised his personal pension contributions. Despite perhaps having no further net relevant earnings, he could continue his current contribution rate for five years following which £3,600 a year could be paid until the age of 75, if required.
Making pension contributions of up to £3,600 a year on behalf of a non-working spouse could increase net joint income in retirement. Similar payments on behalf of children or grandchildren should prove to be very popular as a way of passing on wealth from one generation to another. The donor must also remember that the beneficiaries would be unable to draw from the fund before the age of 50.
The concurrency rules mean that members of occupational schemes who are earning not more than £30,000 a year and are not controlling directors will be able to contribute up to £3,600 a year in addition to, or instead of the maximum additional voluntary contributions of 15 per cent. Local government pension scheme members need not apply, however, as an anomaly in the regulations makes them ineligible.
So individual stakeholder plans are going to be very popular indeed but, ironically, not with the Government&#39s target market. IFAs will benefit enormously because clients will need to be guided through the complexities &#45 not of the relatively simple product itself, but of its numerous financial and tax-planning implications.
As is well known, any employer with five or more employees will have to consider stakeholder as a corporate offering. Alternatively, he or she must be able to demonstrate exemption from the requirement by providing an equivalent scheme. My own view is that for IFAs who are not used to dealing with corporate pensions this market is a difficult one to approach.
Stakeholder pensions are far more complex than the Government seems to realise. In advising on them the IFA should have a sound knowledge of the alternatives &#45 group personal pensions (GPPs), occupational money purchase and final salary schemes.
Corporate IFAs are in a stronger position. They will certainly have a good understanding of the various types of corporate pensions. Their client bank will typically consist of companies employing between 20 and 200 staff. And they will be quite prepared to supplement any reduced commission earnings with fee-charging arrangements. Employee benefit consultants will have larger clients, receive a large proportion of their income in fees and will be offering a wider range of corporate services.
I believe the opportunities for both corporate IFAs and benefit consultants to be enormous. Statistics from the Department of Trade and Industry show that there are 400,000 UK employers with five or more employees. They will need advice between now and October 2001, the deadline by which they must have a scheme in place for their employees. Quite frankly, I don&#39t think there will be enough expert advice to go around. Demand will outstrip supply, and advice will be at a premium.
This is a one-off opportunity to increase client banks. But in order to take advantage of this situation, a very proactive approach to existing clients will need to be adopted. It is necessary to deal with existing clients&#39 stakeholder concerns first, in order to free up resources to tackle what will undoubtedly be a new business bonanza.
IFAs should be in close communication with existing clients and consider holding seminars for them and producing individual stakeholder assessment reports (much of which can be standardised) setting out their options for compliance.
Of course, many clients will have existing schemes. They may decide to extend the eligibility conditions of their pension schemes to admit more members, thereby avoiding the need to set up a stakeholder scheme. Others may pre-
fer to leave the existing pen-
sion scheme membership intact, and to set up stakeholder schemes for their non-pensioned employees. Obviously this increased client activity will produce income.
At PIFC we are now increasingly targeting new clients via seminars, professional connections, telesales and looking at cross-selling opportunities with our individual executive clients for whom we do not currently provide corporate services. After all, many of them will be key influencers within their own companies.
Corporate IFAs and benefit consultants will be keen to get their strategy right when looking to attract new corporate clients currently without pension schemes. Many employers will simply wish to avoid any payments to their empl-
oyees&#39 arrangements and just do the minimum by designating a stakeholder scheme. The rest will be persuaded of the advantages in contributing something and will probably
opt to offer a GPP or an occupational money purchase scheme.
Some advisers will take the view that setting up numerous stakeholder schemes without employer contributions will prove worthwhile in the long run if compulsory contributions are brought in. It is probably better to concentrate on the non-stakeholder market where employers instead offer an equivalent in the form of a GPP or occupational scheme. Effectively they are demonstrating a real interest in their employees&#39 welfare and advisers are therefore better placed to offer additional services in the future.
Research conducted last summer by consultants Torquil Clark showed that simply designating a stakeholder scheme with no employer contribution is not a cost-free option. They estimate real employer costs, excluding advice, to be between £15 and £100 for each employee, a year. Far better to use the advent of stakeholder to show commitment to the employees in what is, after all, an economy with full employment in a number of key industry sectors. Employers have no choice but to work harder in recruiting and retaining key staff. In other words, they should contribute to their employees&#39 pensions.
In summary, I think that the short-term stakeholder opportunities for corporate IFAs and benefit consultants are very exciting. The opportunity to significantly expand their client banks is unprecedented. However, I think that the non-stakeholder market is the key one. It is better approached on a fee basis since the commissions available after the first year are insufficient to support the range of services that the corporate client will need.
Post October 2001, e-commerce must increasingly be used to help deliver effectively other corporate services that will be sought after, such as flexible benefits and work-site marketing, if we are to continue to demonstrate added value in a fast-changing and challenging commercial environment.

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