PracticePeople In PracticeLight at end of pension tunnel

Light at end of pension tunnel

We all know that a state pension will be worthless by the time we retire, but are we saving enough now, and what is the government doing about all this?

Pensions are a big turn-off, unless you happen to work in government. New Labour seems as addicted to playing with pensions as a teenager is to his Playstation.

Recent pension reform announcements have been confusing, and complicated by an element of competition between the Treasury and the Department of Social Security.

Earlier this month, the Treasury unveiled its plans to allow us to save for retirement in unit and investment trust funds (the so-called ‘Lisa’ or lifetime individual savings account). This followed last December’s DSS Green Paper on reforming state pension provision and introducing new portable ‘stakeholder’ pensions.

We are told the overall aim is to force a clearer pensions structure with access to cheaper, adequate pensions for all. The jigsaw won’t be complete until after the next election, when low-cost stakeholder pensions are introduced. In the meantime, accountants with company benefits schemes should not worry – you are well provided for. The self-employed with personal pensions (and anyone who offers a pension deal to staff) should be aware of the changes, although they may not necessarily have a huge impact.

If you don’t currently have a personal pension but are thinking of taking one out, you should find providers falling over themselves to offer you a good deal. John Turton, head of pensions at Best Investment Research, says a few pensions already meet the low-cost, flexible criteria demanded by the government. He publishes a guide to the best pensions on offer from life companies (see box, below). Among his recommendations for those saving #250 a month or more, or a single premium of #5,000 plus, are Standard Life and Royal & SunAlliance.

If you are planning to take out a pension anyway, don’t delay unnecessarily, although you may find a wider choice of pension providers next year, when more of the large unit and investment trust managers are likely to offer personal pensions. They generally have better track records than most life companies in managing pure stock market funds, so if you plan a more aggressive growth strategy than a managed life fund can offer you may want to wait for new launches.

In the meantime, you should look at the existing players in the market: Perpetual launched its personal pension scheme this month, and investment trust groups Flemings and Edinburgh Fund Managers also have low-cost personal pensions investing in their own funds (Edinburgh also allows you to buy other managers’ investment trusts).

We need to look across the Atlantic to get a feel for ‘the big picture’ for pensions.

In the US, many employees have so-called 401(k) plans, a portable savings vehicle that can be used to invest in a wide range of funds – mainly mutual funds, the US equivalent of unit trusts.

When the employee leaves the job, the accumulated cash can be taken away and re-invested in another 401(k) or individual retirement account (IRA) for self-employed people and those without company schemes. Or it can be left to grow untouched until retirement. Americans can ‘borrow back’ cash from the fund for hardship loans and then start to take an income (or lump sums), without penalty, once they are 59 and a half, or over.

The Treasury is impressed with the 401(k) and the recent announcement of new ways to save through investment; and unit trusts is a step on the road to a full 401(k) clone in the UK. Don’t think of it as separate from the low-cost stakeholder pension plans. The stakeholder framework announced in December 1998 will be a flexible portable structure, and a variety of investments can be held in it – rather like a tax-free PEP or ISA wrapper around different forms of investment.

The much-publicised stakeholder pension is aimed at getting more workers to save for retirement. Planned to be operational from April 2001, all firms without an existing occupational pension scheme will have to ‘buy in’ a stakeholder pension (from, for example, a union or even a unit trust company) to offer to their staff. So, if you don’t currently give your staff access to a pension scheme, it is worth keeping an eye on developments.

The charges on stakeholder schemes will be pegged, and there is likely to be a wide choice of providers. Employers will also be able to set up their own stakeholder schemes with a trustee framework, or incorporate them into existing pension plans.

Everyone (in both public and private pension schemes) will get an annual statement showing how much they are predicted to have for retirement.

You will also be able to buy a personal pension that meets yet-to-be-announced stakeholder criteria which will guarantee low cost and easy portability. Virgin Direct is upset that the government is dragging its feet about benchmarking pensions (as it plans to do for individual savings accounts).

Gordon Maw at Virgin says: ‘Customers are confused and asking “is it safe to buy a pension?” What the government should say is that it has benchmarked pensions and say these products are low-cost, flexible and won’t be redundant in two years’ time.’

State provision,/b>

Some of the press coverage has centred on the target audience for stakeholder pensions – those earning up to #18,500 a year.

But as the maximum annual contribution will be #3,600, many higher earners will also be attracted to stakeholder pensions.

The government has also pledged a minimum income guarantee for the poorest pensioners and announced plans to scrap SERPs, the state earnings related pension. The state pension will continue, and rises will be linked to price inflation, so the value of the state pension will continue to be eroded.

A new contributory second state pension will replace SERPs and will allow the lowest paid (less than #9,000 a year) to build up credits towards a much larger pension than they would have got under SERPs. The worst-off, including the disabled and carers, who are currently unable to pay into pensions, will have their retirement income boosted by free credits towards a new state second pension.

Middle earners (#9,000 to #18,500 per annum) will be encouraged to move to stakeholder pensions rather than relying on the state second pension scheme.

The future threat,/b>

An important point about all these reforms is none of them touches the central problem of falling retirement income. Under the current rules, most of us will swap the bulk of our pension funds for an annuity contract which buys an income for life.

These contracts are backed by gilts (government bonds) and other fixed-interest investments – all of which are offering paltry returns.

The Barclays Capital Gilt-Equities study, which monitors the performance of shares and gilts every year, suggests that yields from gilts could fall to 2% in the first decade of the 21st century.

Simon Condor at independent full-service stockbroker Teather & Greenwood is a pensions specialist and has researched the effect of falling annuity rates. ‘Pensions are phenomenally expensive in terms of how much you get out of them. If you know in advance, you can plan for it, but many people believe they will get this mythical 10% return and really it may be 2%.

That is the real problem and all these “Lisa” and stakeholder plans do not recognise that fact.’

At some point in the next few years, the public is likely to start understanding what happens at retirement and then the government may go the whole way towards a US-style pension provision, by allowing us to keep most of our funds invested in retirement and take an income. The problem with that? It all depends on how the stock market is doing.

There are no retirement income guarantees any more – unless you work in the public sector or have a job for life in a firm with a final salary pension scheme. The rest of us will have to accept that retirement planning is going to eat up a much larger percentage of our income during our working lives.


Investment trust group Flemings carries out detailed research into pension provision in the UK. Its survey suggests the picture is getting worse.

In 1996, 54% of self-employed people were not putting enough into their pension to ensure a comfortable retirement. This figure is now estimated at 64%.

This compares with 44% of employees who are not saving enough.

In 1999, an estimated 2.4 million people in their fifties are facing a grim retirement, through a combination of falling interest rates and not saving enough. The comparable figure for 1996 was 1.2 million.

Women who take career breaks to have children in their twenties lose more of their final pension than those who leave childbearing until their thirties.


Best Investment personal pensions guide costs #10. Call 0171 321 0100.

Edinburgh: 0131 313 1000 Flemings: 0500 500161 Perpetual sold through independent financial advisers.

Royal & SunAlliance: 0151 239 4923

– Full details of the government’s pension plans are on the Net at

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