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Surviving Stakeholder – Reasons to be fearful

Is anyone really likely to ask IFAs for “reasons why not stakeholder” letters in the event of recommending a pension product other than stakeholder after its introduction? Is this just another red herring in

the questionable delivery of a pre-election promise to deli-

ver simple, flexible and low-charge pensions?

FSA consultation paper 61, The regulation of stakeholder pensions, simply states that the suitability letter must:

l In the case of a personal pension scheme which is not a stakeholder pension scheme, explain the reasons why the advising firm considers the personal pension scheme to be more suitable than a stakeholder pension scheme.

l In the case of a free-standing AVC plan where the customer has the alternative of a stakeholder pension scheme, explain the reasons why the firm considers the recommended contract to be more suitable than a stakeholder pension scheme or AVC plan.

By creating such a soundbite, are we doing ourselves and the advisory process we execute so well a grave injustice? Are we getting into a draining negative spiral when, in fact, the reasons why letter is a mandatory instrument that IFAs continue to take

forward.

Independent financial advice, as the name would suggest, is an advisory process. Initial counselling is conducted by a qualified practitioner trained to help the customer crystallise their own thoughts and priorities.

Many hours are spent in counsel with consumers to create a complete picture of income, investments, financial commitments, existing insurance and pension plans. An IFA&#39s specialised knowledge and experience provides the intuition needed to honestly evaluate the financial capacity of the customer and match suitable solutions to priorities and means.

Only after building the whole picture of the individual&#39s financial circumstances can the appropriate research be undertaken to provide a solution to achieve financial goals.

This research requires extensive product knowledge built up from continuous contact with the full spectrum of product providers. Today, sophisticated product search software is often used to trawl the marketplace and filter out products that do not match customer requirements.

Further detailed policy analysis is undertaken to evaluate the multitude of policy options available such as charges, premium cost relative to benefit, stop and start penalties and exclusion clauses, to name just a few.

When making the recommendation, the IFA takes the trouble to explain to the customer the solutions and logic in terms that relate to his or her situation as he or she expressed it.

Consumers have voted with their feet for the independent proposition. It is well-known that IFAs have a 55 per cent market share of regular- and single-premium individual life and pension business in terms of value. IFAs also have a significantly higher share of the sales of rapidly growing single-premium policies.

While IFAs would agree that there is no magical formula for success, they have built on their key differentiating factors of:

l A unique proposition.

l Advising rather than selling.

l Extensive product research.

l Clear explanation of solutions.

l Concern to provide long-term financial security for clients.

All this leads to higher standards of personal service, with IFAs building their own business in the community, one person at a time and one company at a time.

Few believe the original stakeholder target audience – people earning between £9,000 and £18,500 a year – is likely to make provision for retirement in view of day-to-day living demands made on their budget even before they start thinking about the future.

A fee-based route is the only way to secure payment for advice. Again, whether this target audience will pay for pension advice remains to be seen.

For wealthier clients seeking pension advice, what can the IFA say about stakeholder?

Stakeholder pensions were to be aimed at employed people earning £9,000 to £18,500 a year who are not eligible to join a company scheme. These pensions will be simple and flexible, with low transparent charges, and explained in plain English.

There is concern that those earning nearer the lower end of the range will lose out on state benefits if they build up small stakeholder pension funds. A new minimum income guarantee was introduced in April 1999 and provides a minimum level of income paid

by the state.

Based on state pension rates from April 2000, a top-up pension of £10.95 a week is payable in addition to the single person&#39s basic state pension of £67.50. For married people, the top-up increases to £14.05 a week.

However, private pensions (and other savings) are taken into account in calculating whether people are entitled to the Mig.

But the tax regime for stakeholder pensions (and, indeed, personal pensions) will introduce an annual limit of £3,600 that can be paid into a stakeholder plan without any need for relevant earnings. So, if you have excess disposable income, you can take advantage of these allowances to fund for dependants.

Further to this, AVC arrangements ought to be reviewed for those earning less than £30,000 in the light of the new concurrency rules surrounding pensions.

Switching future AVC contributions to stakeholder may lead to lower charges and/or higher tax-free cash and/or greater flexibility in investment contribution limits or benefits.

IFAs can produce any

form of reasons why letters

ad infinitum. But surely the crux of the matter is will stakeholder deliver what it sets out to do? Industry speculation suggests not.

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