Workers leave stakeholders to walk alone

Next weekend is not only the end of the tax year, it's the second anniversary of stakeholder pensions. But while sales have been disappointing, these low-cost schemes are a good choice for people whose employers don't offer a company pension and who are looking to build up retirement funds to supplement their state pension.

Some 1.25 million stakeholder plans had been sold up until the end of last year, with 340,688 companies designating a scheme for employees, according to figures from the Association of British Insurers (ABI).

But many of the plans haven't been opened by the Government's target group of low and middle-income earners who don't have any private pension provision. And the total number is well short of the five million schemes that the Government had envisaged would be in operation by now.

"Sales of stakeholder pensions are now running at 33,000 a month – less than half their peak of 75,000," says Alan Woods, head of life and pensions at the ABI. "The vast majority of employer-designated schemes remain empty boxes, without a single member. The need for decisive action to start to close the savings gap is clearer than ever."

Of the schemes set up in the workplace, 90 per cent have no members. Part of the reason for this, it is thought, is that just 9 per cent of employers make contributions to stakeholder plans on behalf of their staff. Without this encouragement, employees don't see the point in contributing to a stakeholder.

Yet even though take-up has been limited, stakeholders are a cost-effective vehicle for retirement funds. Because they are aimed at encouraging those on low incomes with no pension provision to start saving, they have no initial charges and a low annual fee of, at most, 1 per cent. Contributions don't have to be higher than £20 a time either, though anyone serious about saving for retirement would need to pay in far more than this on a regular basis.

Scheme members can vary the amount they pay, as well as investing on a regular basis or intermittently.

Stakeholders are also designed to be transparent so investors know exactly where they stand.

And they are much less restrictive than traditional private pensions: policyholders can switch to another provider, without penalty, if they are not happy with the performance of their plan.

Despite these advantages, there have been problems with the schemes. A quarter of those who have taken out stakeholders have been higher earners taking advantage of the tax breaks by applying on behalf of non-earning spouses or children. The Government's target market – low earners, women and those without any pension provision of their own – have largely ignored the schemes.

Stakeholders have also suffered for being launched into one of the nastiest bear markets for many years. As shares have struggled, people have been less reluctant to invest new money in equities, even through their pension.

To make matters worse, a number of insurers have stopped offering stakeholder pensions altogether because they say they cannot provide them for such a low annual charge. Abbey National and Marks & Spencer have both pulled out of the company stakeholder market. The ABI is calling for an increase in the 1 per cent price cap, arguing that it is uneconomic for providers to market, sell and administer policies to savers with small sums to invest.

But for those who don't have a private pension, whose employer doesn't offer a work scheme but who want to start saving for retirement, a stakeholder could be the answer.

"We certainly continue to recommend them to clients," says Tom McPhail, head of pensions research at independent financial adviser Hargreaves Lansdown.

Mr McPhail recommends AXA's stakeholder plan to investors. This allows them to put money in the company's retirement distribution fund, which means they will be buying into high-yielding equities and index-linked bonds.

Alternatively, investors looking for a "nice, rugged, Land Rover style" pension should opt for Standard Life. Mr McPhail likes this stakeholder scheme because he reckons it has got "good risk controls, competitive charges and pretty good administration". The other factor is that it is "likely to be a long-term player". Stability is a big issue when choosing a pension, and with any stakeholder plan, you should ideally be looking for a provider that will be around for many years to come.

Everyone with a stakeholder or money purchase company pension scheme will also benefit from receiving a new-style forecast between now and April 2004 of what their future pension might be. This will provide a clearer picture of what we can expect in retirement and should give us the impetus to save more for retirement.

Hargreaves Lansdown has produced a stakeholder factsheet for investors. Call 0800 138 5838