The publication of the draft regulations on stakeholder pensions means we
have almost reached the end of the stakeholder journey having overcome a
raft of issues and consultation papers.
The shape of stakeholder is now becoming clear although some details still
need further clarification.
What we finally do know is that the Government has taken on board life
office concerns and included with-profits policies in its proposals.
The move has been widely welcomed by most life offices and, at first
sight, it appears to be a concession to the industry, which lobbied
frantically over the benefits of with-profits funds for inexperienced
But the Government's insistence that stakeholder with-profit funds be
ring-fenced to protect members' assets has raised concern among some
pension providers and IFAs.
They are worried that ring-fencing will put an end to cross-subsidisation
between existing with-profits policyholders and new entrants.
This would mean that if life offices wanted to offer a with-profits
option, they would have to set up a new stakeholder-only version of the
But industry sources fear that such a move would render the new fund
virtually worthless as there would not be enough assets within it to
provide the smoothing of returns that is key to the with-profits concept.
This smoothing is usually provided for new investors by cross-subsidies
from existing members. Without this cross-subsidisation, the fund becomes
more volatile as it can not draw on the spread of assets which marks
with-profits funds out from other investments. The range of assets usually
found in with-profits plans is equities, gilts and property.
Wentworth Rose managing director Philip Rose warns that ring-fencing would
inevitably mean that life offices would have to set up a new fund,
threatening the whole point as to why the industry lobbied for the
inclusion of with-profits in stakeholder.
He says: “The whole principle of with-profits is to smooth the investment
performance by using a surplus from elsewhere. But if life offices have to
set up a fund from scratch, they would have no pooled investments in situ
to draw on. As a result, with-profits would become a poorer investment and
would be less suitable.”
Scottish Mutual pension development director Leslie Gray believes such a
fund would not be a true with-profits fund unless it allowed
But Skandia brand manager Peter Jordan takes a different view on the
issue. He claims that ring-fencing is vital if stakeholder is to meet its
objective of being transparent in terms of charges.
Jordan says: “Without ring-fencing there is no point in having a charge
cap of 1 per cent because this would leave with-profits providers with the
opportunity to use their with-profit assets for other reasons other than
the provision of member benefits.”
“If anything, the Government needs to go a step further to ensure complete
transparency of with-profits charges.
If this cannot be achieved, then it should not be allowed in stakeholder.”
The publication of the stakeholder regulations has also brought up a
potential anomaly in Government thinking. This is contained in the plans to
allow people to make stakeholder contributions for third parties.
The move has been greeted with incredulity from some quarters of the
industry who claim it has opened up a gaping tax loophole which will allow
higher earners to stash away cash from the taxman by making contributions
on behalf of their family members.
The scenario is reminiscent of the so-called “doctor's wife” scam where
higher-rate taxpayers invested in pension plans for their partners because
of the favourable tax benefits.
The pension industry claims this takes the scam to another level with the
potential not just for doctors' wives' but also their sons, daughters,
grandchildren and even nephews and nieces to benefit.
Providers are particularly stunned because of the Government's current
objection to allowing full concurrency within stakeholder which would allow
occupational pension scheme members to also take out a stakeholder plan.
But the Government has blocked full concurrency as it is worried that
higher earners would exploit it as another way of avoiding tax on their
Gray has expressed amazement over how the Government can rule out high
earners benefiting from taking out a stakeholder for themselves while
allowing them to fund plans of up to £3,600 for the whole of their family.
Despite providers believing the move in many ways represents a
contradiction in terms by the Government, they also feel it offers IFAs an
excellent business opportunity for tax planning for higher-net-worth
NPI business development director Stephen Ingledew says: “This shows us
that stakeholder is an opportunity for tax planning with higher-net-worth
clients and is more than just a pension plan for the lower paid. It is an
excellent tax planning tool to pass on a person's wealth to their family.”
Clerical Medical pensions strategy manager Nigel Stammers says: “This
represents a golden opportunity for parents and grandparents to start their
children off on the pensions road. It is an opportunity that no IFA can
afford to miss.”