The first question is an easy one. Once stakeholder pensions are introduced, should everyone who is eligible start one straight away? Yes? Is that your final answer? I’m sorry, you should have phoned a friend: the correct answer was (d) – ‘not necessarily’. For instance, those on low incomes will find their pension savings will simply reduce their means-tested benefits by an equivalent amount.
Stakeholder pensions were supposed to be a simple, inexpensive and easy-to-understand pension for the low-paid who did not have access to a company pension. Significant pressure on the pensions industry has resulted in the ‘inexpensive’ description remaining accurate – and some companies have reduced their charges for other schemes – but it is doubtful whether much remains of the other objectives. The words ‘simple’ and ‘easy-to-understand’ are oxymorons in relation to most tax legislation, but particularly as regards pensions. Most people have got the message that saving for a pension is broadly a good idea, and some have understood that it requires quite significant self-discipline (or a very benevolent employer for whom you work for a long time) to ensure a comfortable retirement. But very few can work their way unaided through the maze of provisions and calculate what is the best option for them.
Let’s try the Janet and John approach (you can tell I’m over 40; my children’s reading books have characters called Biff and Chip!). Suppose Janet is an employee whose employer offers a company pension scheme. This may be a defined benefit scheme, linked to Janet’s final salary, but these days it is more likely to be a defined contribution scheme. In either case, Janet can make Additional Voluntary Contributions (AVCs) into the company scheme, or can make Free-Standing AVCs into a separate scheme.
Once stakeholder pensions are introduced, she will be able to have a stakeholder pension as well as a company pension, provided her earnings do not exceed £30,000 per year.
As far as the employer is concerned, a late amendment to the proposals means only those with more than five employees will have to ensure they make available either a company scheme or access to a stakeholder pension for their employees. This will be welcome for most micro-businesses, although it may lead to an unintended barrier to those contemplating taking on their sixth employee!
Meanwhile John is a self-employed person. He already has a personal pension and thinks he needs not worry about stakeholder pensions. However, if he wishes, he can contribute £3,600 to one of these as well as his existing personal pension – within the existing contribution limits.
If he is feeling particularly generous, he can set up stakeholder pensions for his children, nephews, nieces and anyone else who has not already got one – there is no requirement for a contributor to a stakeholder pension to be over 18 or to have any earnings of their own. He also needs to look at his own pension more carefully, since there are major changes to the carry forward and carry back rules coming.
Whilst stakeholder pensions have been broadly welcomed, and will bring tax benefits to large numbers of people, they have been bolted on to an existing system which was already far too complex. I can’t help thinking that it is time for a radical rethink: perhaps there should be a simple monetary limit for pension contributions, of any kind, by an individual in a tax year? £20,000 would be very similar to the current capping limit on personal pensions, and although it is a lot higher than the #3,600 stakeholder limit, does this really matter when only five per cent of those contributing to a pension currently pay in more than £3,600?
A flat ceiling would have a significant effect on those who have retirement annuity contracts under the old, pre-1988 pensions regime and who are completely unaffected by the current capping of Personal Pension Contributions and the Stakeholder regime. In fact, the answer to ‘Who wants to be a Millionaire?’ is probably anyone who is over about 45, self-employed, earns more than about £100,000 per year and is happily contributing as much as possible to their pension!
Heather Self is a tax partner with Ernst & Young and the Chairman of the Technical Committee of the Chartered Institute of Taxation.
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