Stakeholder Pensions
A Stakeholder pension is a low cost personal pension aimed at encouraging those people who do not currently have pension provision to save for their retirement. They became available from 6th April 2001 and are not a form of state pension.To reach as wider audience as possible, stakeholder schemes are intended to be flexible and easy to understand.
While employers with 5 or more employees had an obligation to provide their employees with access to a stakeholder pension scheme since 8th October 2001 , saving for retirement with a stakeholder or any other savings related product is not compulsory.
Stakeholder pensions are privately run and funded but operate within a standards framework laid down by Government.
You can look at stakeholder pensions as a personal pension with limits on charges, similar to CAT standards that have been introduced for some ISAs and mortgages. CAT marks assure the charge limits and terms applied are, the government considers, acceptable and fair. In the case of Stakeholder pensions, this means that the complex series of charges and penalties previously found in personal pensions are replaced with a single transparent charging rule.
A single annual management charge of not more than 1% of the pension fund value and that is not all; stakeholder plans are individual arrangements, which mean you can take them with you if you change jobs. You can even carry on contributing into them when your not working, because in another change to pension rules. The government now allows you to contribute up to a maximum of £3,600 pa into a stakeholder or personal pension plan! No evidence of earnings, no minimum age. Furthermore, uniquely amongst pension plans, anyone under the age of seventy-five can contribute to a stakeholder plan.
Who's to stop you starting a stakeholder pension for your children?
An important repercussion of the 'no penalties' rule is that you don't have to delay starting a plan until you find the right provider. You can start a plan straight away. If the provider doesn't perform as well as you expect, you can simply take your fund and transfer it to another provider. No penalty!
Another big plus for stakeholder pensions is the fact that providers must allow a minimum investment of no more than £20. This provides much needed flexibility compared to personal pensions, for instance you could make one payment of £20, if money is then suddenly tight, you can stop payments until such a time as you can afford them again, whenever that may be. No penalty!
Stakeholder: What you get and When
With a stakeholder pension, you are allowed to start taking your benefits at anytime between the ages of 50 & 75. Furthermore, you do not have to stop work in order to start taking your pension, though you would be well advised to keep your contributions going and delaying your pension income for as long as possible. Retiring at fifty might sound tempting, but building up enough money to provide a decent retirement income might prove very difficult for most people.
Tax-free lump sum
You are allowed to take up to 25% of your pension as a tax-free lump sum at retirement, but doing so will mean only 75% of the fund is left to provide regular pension income after you've retired. In effect then, you are allowed to exchange up to 25% of your pension fund for a tax-free lump sum at retirement. The rest of the fund must be used to provide an income in retirement through the purchase of an annuity.
Stakeholder summary
If you just want a quick overview of what a stakeholder pension plan is, look no further.
- Tax relief on contributions at your highest marginal rate
- A money purchase scheme
- Minimum contribution not more than £20
- Everyone is eligible unless they are already a member of an occupational scheme and earning more than £30,000 pa or a company director.
- You can pay up to £3,600 pa gross into a plan irrespective of earnings.
- It may be possible to pay more than the £3,600 limit into a plan, provided any sum over this is justifiable under existing personal pension contribution limits.
- A single annual management charge of not more than 1% taken from the fund. there must be no up front charges
- You are free (no charges or penalties) to Stop, increase, decrease and restart your pension contributions at any time and/or transfer your money to another stakeholder scheme.
- All plans will have a default investment choice, this is meant to help make buying a pension easier, and it doesn't mean the fund will necessarily be the right one for you. Seek advice.
