Personal Finance: The stake of the nation

RIGHT NOW, pensions are hardly flavour of the month. People are mistrustful of advice they and charges. And who can blame them?

Aware of the need to encourage more people to save for their own retirement, the Government has proposed a new Stakeholder pension, to be introduced in 2001. While still in the proposal stage, the details need examination.

The first difference between the proposals and current legislation will be the requirement on all employers to offer stakeholder pension schemes, although they will not be obliged to contribute to them.

Stakeholders will also be limited on what they can pay in, to a maximum investment of pounds 3,600 a year or 100 per cent of salary, if lower. Its nearest comparison, the personal pension, stipulates a maximum depending upon age, ranging from 17.5 per cent to 40 per cent.

The CAT standard, recently introduced for ISAs as a voluntary requirement, will be mandatory for stakeholder pensions. CAT stands for "cost, access and terms" and will be applied in various ways, such as allowing lower premiums.

Charges are a core aspect of the proposals, with the emphasis on dramatically reduced costs to increase flexibility, allowing contributions to be stopped, started or transferred without penalty.

The regulator, the Financial Services Authority is keen that no one delay starting a pension. Warnings have already been issued that any new or increased personal pension "sold" from this point must be so low in charges that, when the stakeholder pension is available, contributions to the existing plan may be stopped/transferred without penalty.

But warnings have not necessarily led to lower charges, as certain providers agree only that there will be no penalty if you subsequently transfer to a stakeholder. It will be important for people to be aware of disparities now, to be able to shop for reduced commission.

The benefits of stakeholder pension will be felt by many more if the principles - clear information, lower charges, flexibility - apply to all pension types. If you face pension decisions now, should you delay? Let's consider three cases:

Valerie: aged 35, she has just returned to work after having a baby. She earns pounds 10,000 (pro rata). She is not eligible to join her employer's scheme, as she must have worked continuously for 12 months.

If Valerie were to start a pension now, then join her employer's scheme and then consider a stakeholder pension, this could lead to various small pensions all with their own charges. For the time being she could simply save into a cash account and review her options.

Verdict: Wait for stakeholder or employer's scheme.

Simon: Aged 24, he has been working on contracts since graduating and earns pounds 20,000 a year, although this should increase substantially. There is no employer's scheme and Simon plans to retire early, so serious planning is required.

If Simon were to wait for stakeholder pensions, two years' contributions would be lost. If his income grows, a stakeholder pension may not allow the highest level of contribution, and the older Simon gets, the greater the disparity. Although he can only invest 17.5 per cent of earnings at present, this will rise from the age of 36.

Verdict: Fine line at present. But if he negotiates reduced charges, increases his salary and maximises contributions, Simon should start a personal pension plan now.

Jo: Aged 46, she has worked for the same employer for 10 years and joined its pension scheme. She earns pounds 40,000 and was considering additional contributions, but now wonders whether she should await stakeholder pensions.

Jo should not be unduly concerned; many scheme members already benefit from lower charges. She might find the combined statement helpful, which in time could be applied to non-stakeholder schemes. She should not stop contributing to her scheme as her salary really puts her outside stakeholder limits and she should investigate the options of additional contributions now.

Verdict: Continue existing pension arrangement.

Calculating what scheme to opt for can be tricky. Still, we should not be put off. The number of pensioners is increasing and the workforce supporting them diminishing. Complacency is no longer an option.

Philippa Gee