Low-cost plan may aid the rich

Stakeholder pensions are set to be wide open to manipulation by wealthy tax avoiders - the very antithesis of the group that the low cost pensions should appeal to.

Although there is a £3,600 limit on annual contributions, pensions experts say the Inland Revenue has no method of preventing plan buyers purchasing more than the upper yearly ceiling by going to more than one pensions company.

One said that the system - due in April 2001 - would be impossible to monitor. A second believes that "they are more likely to find a market among the well off and their tax advisers than among the poor for whom stakeholder is intended".

Stakeholder pensions have been designed to "make pension provision available to millions of people who have previously not been able to save into a pension". It was envisaged that most buyers would be in the £9,000 to £18,000 annual income band. The plans will replace personal pensions for most - providing better value with their low costs.

But for the well off involved in tax planning, the biggest advantage of stakeholder is the ability for all the family to have one. Only those in final salary based company plans will be banned.

Personal pensions apply only to "net relevant earnings" - money from work rather than capital gains, dividend income or interest. And they are linked to earnings levels - the maximum percentage retirement income savers can put in varies according to age. For those up to 35, the upper limit is 17.5% of net relevant earnings while for the 60 plus purchaser, the ceiling is 40%.

But those links are broken by stakeholder. Anyone will be able to pay in up to £3,600 a year, irrespective of earnings. On top of that, contributions are paid net of basic rate income tax so, assuming the April 2001 tax rate is 22%, plan holders need pay only £78 for each £100 in pension. There is no need to fill in a tax rebate form as the tax is deducted at source. Higher rate taxpayers will be able to reclaim the difference between the two levels.

Within the rules, a better off person could put in £3,600 and the same amount again for a partner, children, and anyone else under 75 in the family. The absence of an earnings link makes investment for everyone much easier.

Each £3,600 invested will bring tax relief of £792, while the fund will grow free of income and capital taxes. Under present rules, stakeholder buyers will be able to take out 25% of their final pension pool as tax free cash and defer buying an annuity until they are 75. But with compulsory annuities under fire, few believe the system will stay unchanged over the next decades so it could be worthwhile investing in the new system for children.

The Inland Revenue limited the number of plans any one could take out to one a year for a general Pep, and to one every five years for Tessa. It used national insurance numbers to check on those buying over the limit.

It has had more consumer confusion with Isas where up to three can be held in any one tax year, but it still uses national insurance numbers as a check.

However, with stakeholder, there is no limit on how many plans can be opened in one year, providing each is at least £20 and the total does not top £3,600. Pensions specialists say you could have 180 plans a year and stay within the rules. So it is far easier to go over the limit inadvertently or to top the ceiling on purpose.

The ability to buy a stakeholder for babes in arms removes the national insurance number check. NI numbers are given out only as teenagers approach their 16th birthday.

Going over the £3,600 limit could help someone hit by the "pension cap" - the upper earnings limit for pensions contributions, currently £90,600.

But groups like Scottish Life have warned that at the other end of the earnings scale, the least well off might do better spending their money rather than putting it into a pension - and then applying for means-tested income support on retirement.

A £20 a month payment for someone now 20 years away from retirement is unlikely to produce an annuity of much more than £10 to £12 a week.

The Inland Revenue concedes that it is easier to go over the top - inadvertently or otherwise - than under the present personal pensions rules. It hopes to control purchases by the wealthy by asking them to list plans on self assessment tax returns. But it says it has no firm plans at present.

"We don't think there will be much abuse. But we are consulting pension providers," a spokesperson says.