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A couple of months ago I ordered a cuckoo clock over the net from some place in Germany. I had always fancied a cuckoo clock, and having bought me a new house last year, I was going to get one.
I discovered a website that had a good range, found one I liked, sent my credit card details out into some electronic nirvana and it turned up a few weeks later. I followed the instructions to set it up, carefully fitted a hook into the wall because the clock is quite heavy, set the pendulum swinging and there you go; she has been cuckooing at me every half and full hour ever since. Once on the half hour and the time on the full hour. Marvellous. It even has an off lever so that you can kill the bird in the night or whenever you wish. I love it.
Anyway talking of cuckoos, we have the stakeholder pensions, due to be introduced next year. I am deeply suspicious of these. They are a kind of slightly enhanced version of the personal pension scheme, requiring no minimum income requirement in order to qualify, with some other differences as well. But fundamentally, very similar to the personal pension. The same old stuff: invest for a period with an insurance company, get tax relief on the contributions, be allowed to take 25% of the final value as a tax-free lump sum, then be forced to use the balance to buy an annuity at some future unknown return rate, thereby losing 75% of the capital forever in return for an income which at current levels is criminally low.
The very name puts me off. "Stakeholder," what does that mean? Pure marketing bull. In what do you hold a stake? Your own money! That is right. You give the insurance company your money, they invest it for you, you get it back years later but have to buy an annuity with 75%. What stake do you have in anything, apart from a very restricted one in the money which is yours in the first place? The name belies the reality. The insurance companies and the Government are doing you the great favour of allowing you to become a limited "stakeholder" in your own money. Well thanks mate, nice of you, but I'll think about it first.
The truth is that once you have given the insurance company your stakeholder pension contributions, in reality you are no longer a full stakeholder in the investment, not completely, because of the annuity and other restrictions. You have surrendered part of your true stakeholder rights for tax relief. The only point at which you were a stakeholder in the full sense is while the money was still in your bank account, when you owned it outright with no strings.
The thing that has always irked me intensely about personal pension plans is the arrogant, patronising government attitude that a grown person cannot have their own money back when the plan matures. Think about it. What they are saying is that you can't trust a 60-year-old with money, especially their own money! Few seem to be bothered by this, but that is the thing to which the deal boils down. It is your money that you have entrusted to the insurance company. On top of that, they will charge you for investing it, and will often do that badly too. So you give them money, which you can never have back as a lump sum, even though it is your money, not theirs. Nobody with half a brain would consider such a proposal normally, so tax relief is offered to make it more palatable.
Clearly if someone else is paying into your pension plan then that is different. But where it is funded wholly by the investor, I would urge people to give this matter serious consideration before buying, and don't fall unthinkingly for the stakeholder plans when they are introduced; the negative features remain. Don't be taken in by the fancy name, because you are losing rights to the invested capital in return for tax relief, not gaining them.
So what are the alternatives? Well, simply investing your money in a similar way outside of the pension plan. Say a tracker fund within an ISA or whatever. No tax relief, but the money is all yours whenever you need it. That is a true stakeholder investment. You have complete rights over it. You have a 100% unrestricted stake in it, as distinct from a stakeholder pension, where the insurance company has become a partial stakeholder in your money.
And if when the time comes you still think you want an annuity with some or all of the fund you have accumulated, then there is such a thing as a voluntary annuity, which offers major tax advantages over the compulsory pension annuity, all of the latter being taxable income.
Where Next?
• For more on pensions, read our Fool's Guide and visit the Pensions discussion board.