Stakeholder will offer an interesting alternative and perhaps an additionto AVCs in the new pension regime.
Are stakeholder and addit-ional voluntary contributionsa new market for IFAs?
Debate has raged for some time about whether there is scope for free-standing AVCs, as well as AVCs, in helping people plan for a better retirement. The basic argument is that the availability of a company AVC alongside the main scheme must offer lower charges and therefore better returns than the free-standing alternative.
There has always beena view, perhaps a minority view, that the free-standing option allows greater investment flexi-bility, especially where the in-house scheme is deposit-based, and at least some control over when benefits are taken.
Over the longer term, enhanced investment returns can far outweigh the costs involved in establishing a separate plan.
However, the goalposts have to some extent moved,at least as far as the scope for IFAs to add real value to their clients' pension planning, without fear of retrospective questioning over the suitability of the advice, is concerned.
This follows from the recent announcement that members of defined-benefit sch- emes who are not controlling directors and who do not earn more than £30,000 a year can now have a stakeholder plan for up to £3,600 a year concurrently with the main scheme membership.
Clearly, the low charges that are involved in stakeholder, which are likely to be similar to those applying to the main scheme, will make their use as “free-standing” arrangements appropriate.
Stakeholder may also offer much greater investmentfreedom, including the new Individual Pension Account, which offers access to a wide variety of unit trust, Oeics and other instruments.
There are two import-ant differences betweenAVCs and stakeholder, which makes this new option even more attractive.
All AVC benefits (except for pre-April 1987 cases) must be taken as income.
Under stakeholder, up to 25 per cent can be taken as tax-free cash.
The benefits under a stakeholder plan can be taken at any time after 50 – although this might be raised to 55 – rather than at the same time as other pension benefits, as normally applies to AVCs.
But the new rules also throw up an interesting anomaly because it appears it will still also be permissible to contribute into an AVC. As a result, it will be possible for most members of defined-benefit schemes to contribute a higher proportion of earningsinto pension provision than is currently permitted.
This is because, in addition to the employer's contribution, most employees will also be able to invest 15 per cent of earnings, less any contribution to the main scheme, plus up to £3,600 into a stakeholder plan.
For the lower-paid individual on, say £15,000 a year, this might add up to a maximum contribution of 39 per cent in addition to the employer's contribution into the main scheme.
For the higher-paid employee on £30,000 a year, the figure increases by a smaller amount to 27 per cent of earnings – that is an extra 12 points, or 80 per cent more,in real terms.
This creates a potentially better tax relief treatment than for those using personal pensions or stakeholder alone.
In this case, it is not until the individual reaches 51 that the contribution rate reaches the 30 per cent level and they must reach 60, before the contribution rate reaches 40 per cent. Of course, there is no additional employer's contribution under the defined-contribution regime.
All this creates a number of opportunities for IFAs, who can offer additional pension advice to people who are members of a defined-benefit scheme.
First, it will be possible to aim at existing clients who are members of company AVC schemes to ascertain whether they are suitable candidates for extra contributions to be made.
In general, this is likely to apply to those with the following characteristics:
Empty nesters – thosepeople over 50 whose children have left home.
People earning £20,000to £30,000.
People already contributing at least 10 per cent of their income to the main scheme and AVC together.
Second, existing clients with FSAVCs should be considered. They have already demonstrated a commitment to think outside the box by seeking an independent addition to their pension planning.
The characteristics ofthe target audience willbe similar to those indica-ted above but are also likelyto have a broader attitude towards investment strategies. In this case, the new IPA, accessed through a stakeholder arrangement, might be of interest as offering a more adventurous range of options.
The third audience will be clients who are members of defined-benefit schemes who do not have any form of AVC. In this case, they might want to consider stakeholder as an alternative to joining a company AVC if it offers comparable charges and a more suitable investment strategy.
Clearly, this will require some consideration, since the AVC route might be seen as the obvious first port of call.
However, stakeholder has one clear advantage over AVCs – tax-free cash. Those opting for stakeholder instead of AVCs will be able to get a quarter of the fund at retirement as a lump sum rather than as an income and with no tax payable.
Many IFAs will seek to establish stakeholder arrangements alongside defined-benefit schemes specifically to take advantage of the significantly increased flexibility and access to tax-free cash not available under AVC arrangements.
In addition, there is scope for advertising and other marketing activities that would bring this to the attention of consumers at large. Now is the time to start detailed planning.