Stakeholder Pensions

Stakeholder pensions are a type of money purchase pension that were launched by the Government in April 2001 to encourage people to save for their retirement through a simple, low cost and flexible personal pension. They are especially suitable if you do not have access to an occupational pension and can only afford to save small sums.

The pension you receive does not depend on your salary and the money you save is put into investments for you by the managers of the stakeholder pension scheme. On retirement, your fund will then be used to buy an annuity from an insurance company, which will give you a regular income.

Eligibility

To have a stakeholder pension you must be:

Under the age of 75.
A resident in the UK, or a Crown servant or the spouse or registered civil partner of a Crown servant.

You do not have to be employed to take out a stakeholder pension; you can be self-employed, a fixed contract worker, not working or taking a career break. You can also open a stakeholder on behalf of a child.

Stakeholder Pension Standards

Stakeholder pensions must meet a set of minimum standards set by the government to ensure they are flexible and have a limit on annual management charges. These standards include:

The scheme must be run by an authorised stakeholder manager or by trustees, whose responsibility will be to make sure that the scheme meets the various legal requirements.
A capped charging structure: a maximum of 1.5% of your pension fund a year for the first 10 years and 1% a year thereafter.
The minimum contribution must be £20 (or less) in any period ,whether regular or a one-off payment.
No penalties if contributions to an individual's fund are stopped or changed.
No penalties on transferring the benefits to another scheme.
A default investment fund must be available if you don't want to choose your own investments.
Retirement age can be at anytime between the age of 50 and 75 (55 and 75 from 6 April 2010).
At retirement, the option exists to take 25% of the fund as a tax-free amount.

You can save into any number and type of pensions, including stakeholder pensions, and may receive tax relief on contributions of up to 100% of your earnings each year, subject to an 'annual allowance' (£245,000 for the 2009-2010 tax year).

Benefits of a Stakeholder Pension

You don't need to be in employment in order to save in a stakeholder pension.
Other people (such as family members or an employer) can pay into a stakeholder pension on your behalf to help you to save for your retirement.
Stakeholder pensions are more flexible than many other private pension schemes - you can choose when and how often you pay into the scheme and there are no penalties if you miss a payment.
You receive tax relief on your contributions up to HM Revenue & Customs limits; the more you save, the more you get in tax relief.
Charges made by the pension fund provider are capped.
There are low minimum payments.

Investment Choices

A stakeholder pension provider will generally offer around 10-15 unit-linked pension funds to choose from, although some may offer many more. Some providers may also offer access to externally managed funds from other fund managers. The range of funds typically covers the following fund types:

Index tracker funds
UK and overseas equity funds
Risk-based managed funds
Gilt and fixed interest (bond) funds

If you can't decide which fund to invest in, then you can pick the 'default' fund for consumers who do not want to make investment decisions. In the years leading up to retirement, the default fund gradually moves into less volatile investments, providing greater security as you approach retirement.

Is a Stakeholder Pension Right For You?

A stakeholder pension might be a good choice if:

You have no existing pension apart from a state pension.
You're self-employed.
Your employer doesn't offer a company pension scheme.
You aren't working, but can afford to pay for a pension.
You do not pay into a company pension (however, if they do offer access to one, you should seriously consider joining it)
You want to top up your company pension scheme (however, paying additional voluntary contributions (AVCs) may be a better way of doing this).

What Happens If You Change Jobs?

If you change jobs, you can continue paying into your stakeholder pension. However, it's worth checking to see if your new employer offers a pension scheme, as this may offer you a better deal, especially if the employer contributes. If you decide to stop paying into a stakeholder pension, you can leave the pension fund to carry on growing, but you should check whether there are extra fees for doing so.