Stakeholder plan looks increasingly shaky for lower earners

The government is to spend £5m of taxpayers' cash to publicise stakeholder pensions amid growing fears that the new retirement pay scheme - due to start in April 2001 - will prove an embarrassing flop.

Pensions experts claim the chances of the target market buying into stakeholder is remote - no matter how much is spent on advertising. Stakeholder pensions are aimed at those earning £9,000 to £18,000 a year - a band that ranges from below half national average earnings to typical salaries.

But the reality is that many will do better spending the money at the pub or bookies than handing it over to a pensions firm, as any pension may be reduced pound-for-pound by the withdrawal of welfare benefits.

There are positives about the new scheme. Its lower charges will increase retirement earnings for those who are on above average salaries and for the self-employed because costs are to be driven down.

And at the very top, ultra-rich company directors will take advantage of loopholes in the rules to buy tax-benefit boosted pension provision above the current maximum £91,800 earnings cap.

Stakeholder pensions are a government initiative to increase the attractions of personal pensions. Firms with five or more employees must offer a scheme.

They will feature:

• Overall charges limited to 1% a year with no upfront fees;

• A minimum £20 contribution;

• No penalties for irregular amounts or missed months;

• Anyone can have one, irrespective of earnings.

But product sellers will be allowed to charge for advice, although the government believes few will buy into this. Instead, the Financial Services Authority intends publishing a "decision tree"by the end of May.

It should explain whether a stakeholder is right or not for individuals. This "tree" is currently under wraps. So it is still unclear whether branches will include the interaction between stakeholder payouts and social security.

Andy Cox at actuaries Bacon & Woodrow is "not really optimistic that stakeholder will change much for its intended market. And if it does not take off in a big way, there is a lot of political capital to be lost." He says stakeholder will be a waste of time if income support is offset pound for pound by pension cash.

Scottish Life pensions guru Steve Bee is also concerned about suitability. He says: "Stakeholder will not bite without benefit reform. You would need to exempt these pensions benefits from the means test. Building up a decent pension is beyond anyone on less than average earnings."

Someone now aged 55 and earning £15,000 a year and retiring in 10 years time would end up with a £19 a week flat rate pension for the rest of their lives assuming they pay 5% of their earnings into a stakeholder each year. This is based on a 7% growth rate and 1% annual fees and current annuity rates.

If the only other earning is the state basic pension, the holder would do better with the pensioners' minimum income guarantee.

A potential pension buyer on the same salary but with 30 years to go before retirement would end up with £165 a week. Again, part of this would be offset by social security payment losses but it could be worthwhile if this pension purchaser expects to see future salary increases.

Someone contributing 5% of a £10,000 salary - less likely because a low earner may not be able to save £500 a year - would retire with a pension of £10 a week after 10 years, £40 a week after 20 years and just over £100 a week after 30 years.

"These are simply not worthwhile under the present benefits system," says Bee. "But it becomes ludicrous if you take the occasional payer putting in the minimum £20 amount. We calculate that someone of 20 paying in £20 a quarter would only have £7 a week after 40 years and less than £2 a week after 20 years."

One solution is compulsion, but that would be politically difficult as it would be seen as a tax, impacting mainly on the poor. Forcing people to save with a private company without a state alternative could also be problematic.

Cox says stakeholder could do better if the proposed second tier state pension was generous. This is a flat rate boost to the ba sic pension. "It will be compulsory like national insurance and will not be earnings related. But it could take years before it is up and running." But where stakeholder will score is with the better off.

Many currently paying into a personal pension will save by switching into a stakeholder with its lower charges. Some existing personal pensions may be better value than stakeholders. They could also be a good deal for additional contributions to a company pension, but only if the government clears up the confusion on "concurrency" - being allowed to hold a company and a stakeholder pension at the same time.

And for someone running up against the earnings cap, paying the maximum £3,600 a year into plans for a non-working spouse, children and other relations could be an attractive way of saving in a tax-free environment.

Advisers suggest that these payments will also be seen as a legitimate form of inheritance tax planning, more than doubling the present £3,000 a year that can be given away.