Answered by Stephen Moore
Stakeholder pensions vs SIPPs: pension transfers
Stakeholder pensions hold their own
Stakeholder pensions were introduced by the UK government in April of 2001 as a means to enfranchise greater numbers of lower income workers. However, they also have a particular appeal as a pension transfer vehicle. This is partly due to the fact that the charges imposed by such plans are low and enforced by law.
Even so, the costs attached to stakeholder pensions have risen over the years. For stakeholder pensions that were started prior to 6 April 2005, the annual charge is still locked at 1% per annum but for plans set up after this date, annual management charges are limited to 1.5% per annum for the first 10 years with a scheduled reduction to 1% a year after this point.
Most stakeholder contracts will also offer access to modern pension options such as income drawdown, which now confers almost complete freedom as to how you choose to take your benefits (subject to the tax rules).
Although stakeholders are competitively priced compared to many mainstream personal pension contracts, the truth is that numerous SIPPs available today can be accessed at similar costs, or less, depending on the various fund and policy choices.
In general, most SIPPs are also likely to offer a wider range of potential fund choices than the average stakeholder pension although, in reality, most stakeholder contracts will offer a very broad range of investment choices.
This means that when comparing the various merits of a stakeholder pension and a SIPP as a potential transfer vehicle, it’s important to compare both charges and investment choices. Unless, you have particularly esoteric investment needs or want to hold more unusual assets such as commercial property, then a stakeholder should compare well in terms of both price and investment choice.
Stakeholder pensions also have an additional characteristic that may prove very valuable to a growing contingent of savers who are now considering a final salary pension transfer following the new pension freedoms that were introduced in April 2015.
Stakeholder pensions: an ace up the sleeve
Stakeholders have one important advantage over SIPPs when it comes to a potential pension transfer: they’re the only type of pension contract that can’t refuse to accept a pension transfer. Previously, this wasn’t a major issue. However, since the introduction of the new pension freedoms in April of 2015, it’s become a legal requirement to seek professional financial advice on any final salary scheme pension transfer of over £30,000 in value.
Meanwhile, the scheme from which you plan to transfer will require to see evidence that you’ve received such advice before it will authorise a transfer. .
But the final salary scheme in question won’t require that the advice you received from your adviser supports the transfer. The law requires that you seek advice so that you can understand your options – for what’s likely to be one of the most important financial decisions of your life – and make an informed decision.
There’s no requirement that you take the advice your financial adviser provides and nothing to stop you from continuing with a transfer if you decide that, based on your own circumstances, it still makes good sense for you.
However, it’s now emerging that numerous SIPP providers are not only requesting to see evidence of the transfer advice you received, but also insisting that the adviser in question recommended the transfer as being in your best interests before they will accept the transfer.
There’s no legal requirement for SIPP providers to do this but many have adopted a ‘belt and braces’ approach here and are refusing transfers that have not have been recommended by your adviser rather than face potential liabilities down the road.
Stakeholders as stepping stones
The issue of potential liability also weighs heavily on today’s financial advisers. The corollary is that of those advisers who are still willing to take on transfer cases, especially where lower value transfers are involved, there will be a natural tendency toward recommending that the final salary scheme benefits remain where they are.
This is because, in most cases, the added flexibility that comes from transferring to a defined contribution arrangement only really becomes worthwhile for larger transfer values, while final salary benefits provide by far the most cost-effective means to provide a guaranteed, inflation-linked income for life.
With the number of final salary pension transfers now on the rise, thanks to a combination of the new pension freedoms and the historically high transfer values that many schemes are now offering, there’s likely to be a significant number of investors who – for whatever reasons – still want to proceed with a transfer even after a professional adviser has recommended against the move. With many SIPP providers effectively closing their doors to such business, it could be stakeholder pensions that become the default option.
Considering that stakeholder pensions are also forbidden to impose exit charges on any subsequent transfers out, we may also see them being used as a stepping stone for pension transfers that are destined to eventually find their way into SIPP wrappers.
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