Stakeholder pensions – the multi-functional investment
The Multi Functional Investment (Mufin) has arrived. As one would expect, it has been warmly welcomed by the mutual fund industry.
We reiterate that, as proposed, the new vehicle will have to fit within an existing recognised pension structure – PPP, stakeholder, or occupational.
But there does appear to be room for a stakeholder plan otherwise conforming to stakeholder legislation on the form and timing of benefits and tax relief on the new MUFIN without the need for being founded the stakeholder scheme i.e. on a trust.
The MUFIN stakeholder would thus be a simplified stakeholder plan.
The main thrust of the new initiative appears very much to be the clarity and potential for low charging that collective/mutual fund vehicles offer in the eyes of the Government.
As they fit within an otherwise familiar structure there seems to be no technical reason why life offices cannot provide similar vehicles i.e. low charges and portable investments.
The real essence for all provider types is that the public are being increasingly led to expect low charge, portable, flexible, clear underlying investments.
Such investments cannot, by definition, build in sufficient margin for face to face sales/advice.
Of course, this will mean that either the products are bought without such advice or the advice is paid for directly or indirectly by the consumer accepting a higher charged product.
The big question is whether pension products can be correctly and safely bought without advice or with some kind of centrally provided or easily accessed advice.
Leaving aside the issue of advice, all of the funds invested in the pension scheme types, personal, occupational, or stakeholder – under current legislation/proposals at some point have to be used to purchase an annuity.
With gilt yields falling so dramatically, Barclays predict a yield of 2 per cent in the next few years in line with a predicted downturn in returns for all financial assets including stocks and shares, an increasing number of people may begin to look for even more effective ways of saving for retirement.
Gilt yields in particular impact on annuity rates. Currently at 4 per cent they could halve. Even at current rates it is estimated that for a given fund a pensioner could only secure one half the income that could have been secured from a similar fund 10 years ago.
It is this trend that may cause individuals to forego tax relief available on the "way in" to traditional approved pensions and look to fund for future financial security in tax effective funds that do not compel eventual annuity purchase. Of course, we may move to "lifetime drawdown" and any fund, while it remains invested runs a risk, but increasingly this may be the consumer will be willing to run, provided of course that he is properly advised.
Already individuals may consider investing in PEP, ISA and even growth-orientated mutual funds, unit trusts, Oeics and investment trusts with a view to maximising growth and minimising tax by use of taper relief and the annual exemptions. This combination with tax free or tax reduced fund growth could look very attractive – even without tax relief on the 'way in'.
Even if an annuity were purchased with some of the funds there would at least be a capital element.
This is undoubtedly a time of tremendous chaos in the retirement provision business and for those looking to save beyond the bare minimum there appears to be an increased need for advice in order to choose the most appropriate mix of investments and structures to best fit the anticipated work and benefits pattern taking full account of the various needs of each individual investor.
From the Government`s standpoint, the prime requirement appears to be cost reduction and transparency, as the key means to encouraging greater savings. There are those who have their doubts as to whether this will be sufficient to achieve the culture shift necessary to make a real difference to the pensions "landscape" that currently shows less than 40 per cent of employees in occupational schemes.
In closing we should not forget that it was only very recently that the Government made saving for retirement through pensions vehicles so much harder by abolishing the tax credit on dividends received by pension schemes.