Comparison of old style Personal Pension vs the new Stakeholder
Stakeholder pensions were introduced by the government to counter the well founded criticisms of high charging personal pensions
Wheras the charges on the old style personal pensions were often up to 5% a year, the Stakeholder pensions are supposed to cost a maximum of 1% a year in charges (ie if your pension fund has £100 in it the most you can be charged is £1).
So it seems clear that Stakeholders are better for you than a personal pension. However there are a number of arguments – mainly from IFAs – against this. The prime areas of contention are:
Most Personal Pensions are actively managed funds wheras most stakeholders are invested in “passive” tracker funds.
Basically the idea with the personal pension is that a fund manager will ensure there’s a better return on your investment by actively managing the pension fund eg changing where it’s invested on a regular basis to take advantage of the latest financial situation.
Because the charges are “so low” on the Stakeholder pension it’s not really possible to pay the fund manager’s huge salaries, so it seems that almost all of them are index tracker type funds – meaning they grow or shrink by “tracking” the general stock market.
This pro-personal-pensions argument is based on the premise that pension fund managers can actually make enough of a difference to counter the accumulated damage that their charges and inflation will have on your pension fund.
There is an ongoing debate though that Tracker Funds often out- perform the actively managed ones, particularly when all the charges are taken into account.
The commission an IFA gets from signing you up to a personal pension is higher than if they sign you up to a Stakeholder.
In fact the commission is so low from Stakeholders that many IFAs aren’t bothering to deal with them at all and may suggest you go direct to the pension providers. (This might go some way to explaining where a lot of the arguments in this section are coming from).
The problem with going direct is that you won’t get any “advice”, for example about which is the best provider to go with…
A way around this problem might be to find a good IFA and pay them a fee for giving you the best advice – see Fees versus commission.
However IFAs are now claiming that if you get a personal pension through them you are effectively getting free advice. In other words they may recommend a personal pension which has all the low charges and flexibility of a stakeholder but you’ve gone through the useful process of having your circumstances checked by an expert.
Considering the very low take up of the stakeholder this argument is quite a strong one in that IFAs are recommending you save for retirement and actively encouraging you to do so. Wheras if it’s just left to you it’s more likely that you won’t get round to it…
Most personal pensions are now much more flexible than they ever were before the stakeholder.
Where the stakeholder definitely seems to have the upper hand is if your contributions are relatively low, say less than ?50 a month.
Bear in mind that stakeholders are actually a type of personal pension. They’re only different in that they have legally set limits to what they can charge and so on.
The maximum charge is supposed to be 1% a year, but it’s become apparent, since the launch of stakeholder pensions, that the providers can charge more than 1% a year.
“As well as the 1% the law allows providers to recover costs and charges they have to pay for certain other things. For example. stamp duty.other charges for buying and selling investments for your fund. the costs of sharing a pension when a couple divorce.” (The DSS).
The Financial Services Authority reportedly says these could bring the average stakeholder charges to 1.3% a year.
Well that’s a 30% increase on the much publicised “1% maximum charge”.
Meanwhile, thanks to the introduction of the stakeholder, many “real” personal pensions have greatly reduced their charges down to match the stakeholder.