With less than two months to go before the start of the new defined-contribution pension regime, the market is still a long way from understanding the new rules.
Feedback at Skandia IFA workshops during the first few weeks of 2001 suggests the market has not yet grasped that personal and stakeholder pension schemes will be subject to the same tax and benefit structure.
As the regulations and practice notes detailing the new regime are unambiguous on this issue, one can only assume that the market has been infected by a devastating outbreak of what could be referred to as “mad stakeholder disease”.
This potentially lethal disease has encouraged IFAs to imagine all sorts of differences between personal and stakeholder pensions. Some of the more common misconceptions are that:
l anyone contributing more than £3,600 must use a personal pension; l the new £3,600 de minimis contribution limit only applies to stakeholder pensions; l drawdown is not available under stakeholder pensions;
l the rules that allow occupational members to contribute to stakeholder pensions do not apply to personal pensions; l stakeholder pensions cannot accept transfers;
l waiver of premium continues for personal pensions; and,
l the PIA's guidance governing non-stakeholder recommendations only applies to regular premiums.
These perceptions are all wildly inaccurate and have unfortunately led a worrying number of IFAs to believe that they must recommend stakeholder pensions from April 6. This is, of course, wrong.
Both types of product are available and it is this that will ensure investors continue to have a choice. This is important now the Treasury is trying to clear the way for stakeholder providers to sell their products via their banking partners without giving their customers any choice at all.
If they sell stakeholder products, all they need to do is pick a provider and sell the product irrespective of how good or bad it is. This means that an IFA could become the only place where clients are given a choice. Without an occupational scheme, this choice will typically be between personal pensions and stakeholder pensions. In this case, it will be for the IFA to decide which is most suitable.
Despite some of the thoughts driving the market at the moment, PIA guidance has confirmed that IFAs can recommend personal pensions if they consider them to be “at least as suitable” as a stakeholder pension. This will make it impossible to recommend more expensive personal pension products that provide similar benefits to stakeholder pensions.
As a result, IFAs will need to recommend personal pension products that are fundamentally different and provide real added-value benefits to compensate for any extra cost.
As personal pensions will not hold any strategic tax advantages, the role for personal pensions will be all about providing superior investment choice. The absence of charge caps mean that personal pensions are in a superb position to deliver a real alternative that surpasses the “at least as suitable” requirement and delivers a product that is “more suitable” than stakeholder pensions.
Stakeholder pensions will be easy to sell and advice will be minimal, but the commission will reflect this. This means the only IFAs in this market will be those who can compete with the distribution powers of the high-street banks. Few, if any, IFAs will be able to do this.
This suggests that most IFAs need to find a quick cure for mad stakeholder disease and distribute products that will provide better value than stakeholder pensions and more adequately cover the costs of providing personalised advice.
The decision is similar to that IFAs faced with Cat standard Isas – use charge-capped products or recommend more expensive products that provide better overall value. As IFAs successfully followed this approach with Isas, there is no reason at all why they cannot apply the same approach in the individual pen-sion market.
Only time will tell how things work out. But whatever happens, IFAs are in control of their own destiny.