L&G delivers a pep-up for stakeholder

Stakeholder pensions are one year old today – but their future is still mired in controversy. While the Government maintains they are happy with the way it has gone, there is growing criticism that the stakeholder is missing its target market, accompanied by calls for the scheme to be made more attractive in the way Peps and Isas were in their early years.

Stakeholder pensions are one year old today – but their future is still mired in controversy. While the Government maintains they are happy with the way it has gone, there is growing criticism that the stakeholder is missing its target market, accompanied by calls for the scheme to be made more attractive in the way Peps and Isas were in their early years.

After lengthy consultation and much tinkering, stakeholder pensions were introduced last April by Alistair Darling, the Secretary of State for Work and Pensions. It is a savings scheme designed for retirement that can be either occupational or personal as long as it is certified as fulfilling minimum standards laid down by law, and is provided or managed by an approved firm.

Charges are limited to 1 per cent of the value of the holder's fund each year. Advisers can charge extra for advice. Firms employing five or more people must offer a stakeholder scheme, and 320,000 out of 350,000 have – but they do not have to contribute. You can contribute up to £3,600 a year, for which you will receive tax relief up to a maximum of £792. You can contribute regularly or occasionally, without penalty. The provider can insist on a minimum contribution, but that must not be more than £20 a month. In practice, at least £100 a month is advisable. The later you start, the more you have to chip in to catch up. You can invest more than £3,600 a year, but the extra is subject to normal pension rules.

Stakeholder was intended to bridge the pensions gap for people who might not otherwise have enough to retire on. The target income group for stakeholders, said Mr Darling, was £10,000 to £20,000. For the past year the Government has been dogged by criticism that it has been too much of a savings tax loophole for the better-off, putting money in the names of their spouse or children.

But a report on the new scheme published by the ABI this week tends to support that only partially. It found that over 750,000 people have bought a stakeholder pension, 97 per cent by or for people of working age. Only 2 per cent were bought for children, and 1 per cent by the over-65s. The bulk have been bought to make regular contributions, with an average so far of a still too-low £81 a month. Where stakeholder pensions have been arranged through an employer, 70 per cent of policyholders earn between £10,000 and £30,000 a year. Of stakeholder pensions that have been bought individually (ie not through an employer), 43 per cent of policyholders earn between £10,000 and £30,000 a year. But, backing the tax-loophole criticism, of that 43 per cent a quarter have no earnings.

Many critics were not mollified. Alan Steel, an independent financial adviser (IFA) in Linlithgow, Stirlingshire, said: "It's really a disgrace. It's sitting on top of what's already a mess of phenomenal changes, and the public is thoroughly confused."

That is borne out by a NOP Omnibus survey for the adviser lobbying group IFA Promotion. It found that 15 million UK adults have still never heard of stakeholder pensions, including more than half of the poorest social groups. Despite, or maybe because of, a government awareness campaign, 57 per cent of adults find pensions confusing, compared with 42 per cent a year ago. Over 13 million people have made no pension provision, relying totally on the state basic and second pension which together should provide about £7,000 a year depending on earnings and national insurance contributions.

Inevitably, proposals for improving stakeholder are flying thick and fast. Mr Steel advises the Government to scrap 90 per cent of present pensions legislation and start again with a clean sheet.

Ian Lowes, technical director of Lowes Financial Management in Newcastle, said: "I am convinced that compulsory contributions will be required to be made to these plans before the end of the current Parliament. It will be a matter of time until those of us who have been forced to contribute find that our basic state pension is gradually reduced. This ultimately amounts to nothing more than the privatisation of state pension provision."

The Association of British Insurers (ABI) wants more incentives to encourage greater pensions saving with compulsion "if necessary". It would also like to see employers more involved in helping people to save, by inviting financial advisers into factories and offices, and encouraging more employers to contribute to employees' pensions. It also advocates reforming the current pensions framework so that it is simpler to administer and easier to understand.

This week Legal & General, the pension provider, announced a four-point plan to boost stakeholder:

* For two years, government should match the first £100 per month saved in a stakeholder pension with a further £50.

* Encourage employers to match contributions from employees at 50p in the £1.

* Employers to recommend stakeholder pension schemes to staff without fear of repercussions under the Financial Services Act, as at present.

* Financial Advisers should be subject to lighter regulation when advising on Stakeholder.

L&G says the £50 top-up will not cost public money as there have been large savings on pension tax relief due to the low charges pension providers are allowed to levy on stakeholder.

A baker ups his pension stakes

People in Kilmarnock, 20 miles south of Glasgow, would not be able to butter their baps on the breakfast table or their scones at tea time without the help of Jim MacDonald, because he is up at dawn to drive a delivery van for Ferguson's, one of the town's main bakers.

Stakeholder pensions could not have been better timed for Mr MacDonald, 37, because his previous employer ­ a crisps and sweets wholesaler ­ had gone bust and he was acutely conscious that he had no easy way of keeping up his pension contributions.

Mr MacDonald has three other pensions from employers which have shut down over the years.

After stakeholder was launched a year ago he contacted Legal & General (L&G), the financial services provider, and signed up last May to invest £50 a month plus tax relief.

"This way, it doesn't matter who I am working for, I can just take it with me and either stop paying for a while or still keep my contributions going," said Mr MacDonald, who lives in Irvine, Ayrshire, with his wife Elaine and children Ami, 13, and Greig, 10.

Meanwhile L&G has devised a four-point plan to boost the stakeholder, with matching contributions from the Government and employers.