Stakeholder: a tax dodge for the rich?

Stakeholders are more transparent and cheaper than traditional pensions

By BBC News Online's personal finance reporter Sarah Toyne

The government introduced stakeholder pensions to encourage us to save for our retirements, but its efforts are struggling against public apathy and growing cynicism of the pension industry. So what has happened?

Stakeholders will also clearly benefit the wealthy, with the financial pages now full of advice on how rich grandparents can open them for their grandchildren

IPPR report

Stakeholder pensions offer a transparent, flexible and cheaper way of saving for retirement than many traditional pension schemes.

Annual charges can be no more than 1%, investors are free to deposit only a minimum of £20 and they can stop and start their investments penalty-free at any time.

Their introduction in April has opened up retirement planning for women who have given up work to have children.

Under Inland Revenue rules, anyone without an income was excluded from saving into a personal pension.

Non-earners can invest up to £2,808 a year and receive basic-tax relief. This means the government will contribute 22p for every £1 invested - a total of £3,600 a year.

Stakeholder pensions are not only aimed at housewives, the government's main target group is those with lower-incomes - earning between £9,000 and £18,000 a year.

So, what's happening?

There have been a number of surveys recently highlighting take-up problems.

By October, any company with five or more staff who are not otherwise exempt must set up a stakeholder scheme for its employees.

But according to a survey by Virgin, one in ten companies have not prepared for stakeholder.

Getting of the treadmill: a decent income is essential

No figures have been published to indicate that low-income households are shying away from stakeholders but there are anecdotal reports.

These suggest that stakeholder pensions are becoming a tax-efficient savings vehicle for middle-class families.

For three reasons:

Investing £15 a week for the first 18 years of your child's life could ensure a comfortable retirement.

Assuming they retired at 65, a growth rate of 9% and current annuity rates, they could enjoy an annual income of £30,000.

Employees who want to top up their company pension can also take out a stakeholder if they earn less than £30,000 a year.

Higher-rate taxpayers can exploit a tax loophole. As well as receiving basic-rate tax relief at 22p for every £1 invested, they can also reclaim a further 18p through self-assessment.

Growing concerns

A report by the influential think-tank the Institute for Public Policy Research (IPPR), released on Wednesday, highlighted concerns.

It said: "Stakeholders will also clearly benefit the wealthy, with the financial pages now full of advice on how rich grandparents can open them for their grandchildren.

"Although the stakeholder pension is a simple concept, the environment it has been launched into remains complex.

"The largest question mark is over the ability of the stakeholder pension to reach the intended target group - roughly those on between half average and average earnings. "

Wider problems

One of IPPR's main concerns is over the imminent introduction of the State Second Pension - and whether people are confused by two 'contradictory' policies.

From next April, the State Second Pension will replace the State Earnings-Related Pension (Serps) .

Everyone who works will contribute to the new scheme through their National Insurance (NICs) contributions, unless they have already opted out through a company pension scheme or a personal pension scheme.

The new scheme is designed to give low earners a better pension.

Anyone earning more than the lower earnings level, currently £72 a week (£3,744 a year) but less than £9,500, will be treated as though they earn £9,500 under the new rules.

Those people on low incomes will see their pensions increase, while people earning £21,600 or more will not be affected.

General advice

Opting out of the State Second Pension could cause its own problems.

IPPR is concerned about the quality of advice available to people to help them decide whether they should opt for a stakeholder or State Second Pension.

"There are potentially significant problems relating to possible mis-selling," the report concludes.

Growing cynicism

There is a growing cynicism about the pensions industry, following the Equitable Life debacle and pension mis-selling.

The Treasury and Financial Services Authority, the chief City watchdog, are also investigating with profits funds - one of the main ways to save for a retirement, so what should people believe?

Other solutions?

Not everyone wants to 'put their feet up' or can afford to retire when they reach their sixties, but many who want to continue working are faced with rules and discrimination which stops them from working - even part-time.

The government must ban ageism by 2006, under new legislation from Europe.

But, there is growing pressure on the government to speed-up the process.

Age Concern wants more flexibility over when people can retire.

But it does not feel that increasing the basic state retirement age is necessarily the solution for everyone - particularly those in physically arduous jobs.

Rhian Beynon of Age Concern says: "Tackling age discrimination among younger working people, especially men in their 50s should be a priority.

"Many people are suffering enforced retirement, often when they are still helping children through university - and trying to save for their retirement."