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Why Cat shouldn&#39t get its clauses into GPPs

Can group personal pensions and occupational money-purchase schemes survive the Catmarking of stakeholder pensions?

If a comparison is drawn between GPPs and stakeholder pensions, the observer will quickly conclude there is, in fact, little difference between the two. The similarities are significant and the differences relatively cosmetic.

They are both money-purchase plans, with the ultimate benefits depending on contribution levels, investment returns and the charges extrac-ted by the product provider. At retirement, the fund has to be converted into income, typically, by the purchase of an annuity.

Stakeholder is a low-cost personal pension with a few slightly different rules. Where the contribution is up to £3,600 a year, no evidence of earnings is required to justify the payment. However, this is also true of personal pensions with effect from April 6, 2001.

It is only if the contribution is to exceed the £3,600 limit that evidence of earnings is required and the excess contribution will be into a personal pension rather than a stakeholder plan.

Stakeholder has a 1 per cent limit on annual management charges and, except for advice, which can be charged for explicity on top of the 1 per cent, no other charges are allowed.

Importantly, the stakeholder plan must be totally transferable and no transfer-out or transfer-in costs are allowed. But many GPPs are already operating on the stakeholder charging structure.

While it can result in a significant reduction in the level of commission payable to an intermediary, stakeholder will also, in many instances, result in a better value-for-money product for the consumer. But not in every instance. Some consumers with existing personal pension plans (individual or group) will be better advised to keep these going rather than switching to a new stakeholder plan.

Where an existing personal pension is held to maturity, it is likely to be more cost-effective than stakeholder. Illustrations for stakeholder plans will show a consistent 1.1 per cent reduction in yield figure (although at least one major provider will be showing a 1 per cent reduction in yield as a result of interpretation of the regulatory rules). The ongoing reduction in yield for an existing personal pension might well be less than 1.1 per cent.

If personal pensions in the past had offered better value-for-money transfer values, it is highly likely that stakeholder pensions would not have been introduced. That said, transfer values were never a good way of judging a plan as so few planholders ever transferred.

Remember that stakeholder is a political product – it exists because personal pensions were introduced by the previous regime. Let me repeat again, stakeholder pensions are personal pensions.

Occupational pension schemes established on a money-purchase basis must also consider the threat of stakeholder. However, money-purchase plans under occupational rules offer a potentially better benefit than stakeholder in the form of tax-free cash.

Stakeholder will provide a tax-free cash lump sum of 25 per cent of the final fund value, just like personal pensions, whereas occupational money-purchase plans will have tax-free cash calculated by reference to length of service and final remuneration (or the 2.25 multiple of the pension produced). In some instances, tax-free cash produced by the occupational route will exceed the 25 per cent figure.

It will be a brave adviser, indeed, who alters a scheme to the stakeholder basis without properly communicating the tax-free cash differences.

Some advisers are rushing around convincing employers to set up GPPs in order to be exempt from stakeholder requirements. There is no need for an employer to rush into setting up a scheme. Stakeholder is not the bogeyman some are making it out to be.

All an employer has to do (from next October, not next April) is to designate a scheme and, if any employee wants to join it, to make arrangements to deduct their contributions from pay and remit them to the plan provider.

This is not sufficiently onerous that an employer should be rushed into arranging a plan now. Employer and employee contributions are not compulsory and it may be several years before the Government makes them so. An employer which does not want to help its employees fund for retirement is under no current obligation to do so.

That said, if there is an existing plan in place to which the employer contributes, I can see very few instances where an employee will be advised to insist on a stakeholder pension and miss out on the employer payment.

Some occupational money-purchase schemes may decide to introduce immediate vested rights so that an employee leaving service inside two years might benefit from the employer contribution. At the present time, early leavers from such schemes are often disadvantaged by losing their rights to the employers&#39 contribution.

Personal pensions and occupational money-purchase plans may well survive the launch of Catmarked stakeholder schemes. But the best news for the consumer is that prices are being driven down.

NICK BAMFORDManaging director, Informed Choice


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