The rules for stakeholder pensions could have serious implications for investors transferring from a personal pension with life cover included to a stakeholder pension with the same benefit from April 6.
Investors may find that they are unable to have the same level of life cover as before because the new calculation method means the same level of cover would require a bigger pension contribution. And the 1 per cent annual management charge may make it impossible to make any allowance for life cover.
Currently, the amount of life cover that can be bought is a proportion of the pension contribution. Pension contributions are linked to a percentage of earnings, which change dependent on age. But life cover will never exc eed 5 per cent of the contribution.
For plans taken out from April 6, the maximum level of life cover available will be calculated as 10 per cent of contributions for personal pensions and stakeholder pensions.
In the table of individual stakeholder-friendly plans below, seven include life cover now but the plans from AIG Life, Barclays Life, Friends Provident, Nor wich Union, Schroder and Virgin Direct do not.
The industry is in agreement that if life cover is provided with a stakeholder pension, it has to be done under a separate arrangement. And the 1 per cent annual charge cap seems to be the industry's main sticking point.
Frie nds Provident head of stakeholder strategy, Paul Stanbridge says: “I can see two problems. The cha nge in the calculation basis of life cover could leave little or no allowable contribution with which to provide life cover. And the underwriting pro cesses will slow down but administration costs will go up, placing the 1 per cent charge under strain.”
Scottish Equit able director of pensions dev elopment, Stewart Ritchie says: “With stakeholder-friendly plans there is no problem providing life cover, but with stakeholder plans the cost must come from within the 1 per cent charge cap. It is therefore not practical to include life cover.
“In theory, stakeholder contributions can fluctuate and even stop, so under the new rules it could be virtually impossible to provide the level of cover specified for a client. “But this does not stop a packaged arrangement with separate life cover being sold by IFAs at the same time as the stakeholder plan.”
High clere Financial Ser vices Partner, Alan Lakey says: “A client who has a personal pension with life cover included but transfers to a stakeholder on the same basis may have a problem in that the same cover level may not be achieved due to the new way life cover will be calculated. The reason behind the change in calculation could be that the Treasury does not wish to continue subsidising life cover.”
The stakeholder-friendly pension market has already sustained its first casualty with Equitable Life closed to new business from Decem ber 8. This brings the number of companies offering individual products to 13. With the addition of Scottish Life in the group market there are now 20 players.
So far, only 23 companies have had their plans app roved by the Inland Revenue and Opra. These are Abbey National Life, Axa Sun Life, Barclays, Britannic, CIS, Clerical Medical, Friends Provident, HSBC, Legal & General, Marks & Spencer Financial Services, NatWest Life, Norwich Union, NPI, Pearl Assurance, Prudential, Royal & Sun Alliance, Royal Liver, Royal Scottish Assur ance, Scottish Life, Scottish Mutual, Scottish Widows, Standard Life and Virgin Direct.
All these plans are designed for individuals and groups.