Pensions you can trust with your life

FORTY PER CENT of us don't pay into any company or personal pension scheme. And the excuse is not always low pay, according to NOP Research. One in four people with no pension has a household income over pounds 25,000.

The Government hopes its new plans to overhaul pensions, published last week, will get millions of us into the savings habit. It believes many people are put off by "the complexity of pensions and ... by the difficulty of finding affordable and re- liable independent financial advice".

New Labour's solution is to endorse a new version of personal pensions. They will be cheap and flexible and offered through employers, or direct from pension firms - without having to pay commission to salesmen.

The proposals for these new "stakeholder" pensions were outlined last week along with plans to unravel the present, complicated state pension schemes and replace them with more straightforward policies. The changes are likely to be brought in during 2001.

Under stakeholder schemes, every worker - and people staying at home to care for relatives or bring up children - will be able to put up to pounds 300 per month (pounds 3,600 a year) into their pension. The target group is the 10.75 million workers earning between pounds 9,000 and pounds 20,000. Half of these have company pension plans, and another 2.5 million pay into a personal pension. Many of the latter group would probably get better value from a lower-cost stakeholder scheme.

Much of the newspaper comment in the wake of the Green Paper has suggested that people earning more than pounds 20,000 (and who aren't eligible for a company pension scheme) won't be attracted to stakeholder pensions. That is not the case. An upper contribution limit of pounds 300 a month is far more than most people pay into their pension scheme, and the low cost of setting up and running stakeholder funds means they will appeal to a broad range of workers, some of whom will be high earners.

A large part of the stakeholder's appeal is that it cuts out the need to seek pensions advice from a salesman or adviser. Commission and heavy set-up and management charges typically eat up 25 per cent of the final value of a personal pension fund.

Employers with no pension scheme of their own will have to team up with pension firms to offer access to a stakeholder scheme. Their employees will be able to contract out of the new State Second Pension in the same way as many now contract out of Serps, in return for enhanced rebates into the personal or company pension scheme. Anyone will be able to buy an "off the shelf" pension with the stakeholder title and be sure they are getting a good deal.

Pension providers have until the end of March 1999 to give their responses and suggest changes to the proposals. The Government has not specified exactly how low the charges on these pensions will have to be before they qualify for the "stakeholder" endorsement, but industry commentators suggest charges may well be pegged at 1 per cent a year - in line with the benchmarking scheme for new Individual Savings Accounts (ISAs).

The CAT marking scheme (standing for low Charges, easy Access and fair Terms) for stock market investments will peg charges on unit and investment trusts at 1 per cent per year. In practice, this means the only funds to qualify easily for CAT marks will be tracker funds, which are run by computer and simply mirror the performance of a particular index (usually the FT-SE All-Share or 100). Trackers are already used by some of the new low-cost pension providers, including Tesco (managed by Scottish Widows) and Virgin Direct. Both firms welcomed the Green Paper proposals.

Martin Campbell, development director at Virgin Direct, says a 30- year- old who pays in the maximum of pounds 300 per month for the next 30 years would end up with a final stakeholder pension fund totalling pounds 421,000. This assumes no initial charge for taking out the pension, and annual charges of 1 per cent.

"We think this is very good news from a customer's point of view," Mr Campbell says. "In two years' time, pensions will be turned on their head. We are lobbying for stakeholder rules to be offered as a yardstick for all pensions - people could get access to these products now."

Most of the more traditional big pension firms are also likely to offer stakeholder schemes but have mixed feelings about the proposals. CGU Life's pension strategy manager, Jerry Barnfield, says: "We are a bit uncertain about the need to set up a new regime. That's driven by politics." Mr Barnfield suggests it will be possible to keep costs low because there will be no need for the expensive regulation demanded when an adviser sells a personal pension.

Many people want to see pension schemes made compulsory. "The only way you'll get people into pensions is to force them in. People are either spenders or savers," says Peter Hargreaves, managing director of Hargreaves Lansdown.

Mr Barnfield suggests the Inland Revenue will offer tax "sweeteners" to entice more people to join stakeholder schemes. And after the next election a newly re-elected Labour government might well have the confidence to impose compulsory pension contributions on middle earners.

If you don't have a pension at the moment, don't wait for the new reforms to come into force. Virgin Direct calculates that a 35-year-old who puts off starting a pension for three years will have to pay an extra 5 per cent of his or her salary each month to make up the shortfall in compounded savings. If you have a company pension you should almost certainly join that scheme. If not, and you want advice, many good independent advisers will share their commission with you. Mark Howard, at independent financial advisers Maddison Monetary Management, says: "It's just a matter of time before every individual is forced to save into a pension scheme. Do you want to be forced? Now is the time to take action."

If you don't want to pay commission in return for advice, there are some excellent low-cost deals around from phone- based providers, investment trusts such as Flemings, and discounted pensions offered by execution- only brokers - including Hargreaves Lansdown and TQ Direct Choice. These will repay most of the commission they earn for selling pensions.

Contacts: Flemings, 0500 500161; Hargreaves Lansdown, 0800 850661; TQ Choice Direct, 08000 561836; Tesco, 0845 845 5555; Virgin Direct, 0345 949494.