How stakeholder pensions work
A stakeholder pension is a money purchase pension provided by a bank, building society or insurance company. Trade unions may also offer stakeholder pensions to their members. You pay money to your pension to build your pension fund.
The pension provider invests the pension fund on your behalf. The value of your pension fund will be based on how much you have contributed and how well the fund's investments have performed.
It is best to make regular contribution payments if you can. But you can stop payments for a while if you need to without it costing you anything. However, that will mean you have a smaller pension fund unless you make extra payments later.
When you reach the age when the stakeholder pension can be paid, you can use the fund you have built up to buy an annuity. This is a regular income, payable for life, which you can buy from a life insurance company.
When you can take your stakeholder pension
The earliest age you can take a stakeholder pension is usually 55, depending on your arrangements with the pension provider. You don't need to be retired from work to get your stakeholder pension benefits.
How stakeholder pensions differ from other personal pensions
By law stakeholder pensions must meet government standards to make sure they offer value for money, flexibility and security. The standards include:
Limit on annual management charges
Managers can charge fees of up to one and a half per cent of your pension fund each year for the first 10 years and after that, up to one per cent.
- you can switch to a different pension provider without penalty charges
- you can start contributions from £20 a month, and pay weekly, monthly or lump sums when you want
- you can stop, re-start or change your contributions without penalty charges
The pension must be run by independent trustees or auditors who are responsible for the pension meeting the legal requirements.
Is a stakeholder pension suitable for you
A stakeholder pension could be suitable for you if:
- you are self-employed and don't have a workplace pension
- you aren't working but can afford to pay for a pension
- you want to save money for retirement on top of your workplace pension
- your employer offers it as a workplace pension
Contribution levels and tax relief
You can save as much as you like in different pensions, including stakeholder pensions. You get tax relief on contributions of up to 100 per cent of your earnings each year. This is subject to an 'annual allowance'.
For example, if you pay tax at 20 per cent, for every £80 you pay into your pension, you get £100 in your pension pot. If you pay tax at the 40 per cent or 50 per cent rate you can claim the extra tax back. Savings above the annual allowance are subject to tax.
If you don't pay tax, you can still get tax relief on your (or someone else's) contributions up to a certain limit.
Find out more about the current annual allowance for tax relief at the link below:
Since 6 April 2012 you cannot contract out of the additional State Pension through a stakeholder pension. If you contracted out to a stakeholder pension previously, you started building entitlement to the additional State Pension from 6 April 2012.
Your employer offers a stakeholder pension
If you're in a stakeholder pension scheme that was arranged by your employer before 1 October 2012, they must continue to deduct contributions from your wages until:
- you ask them to stop
- you stop paying contributions at regular levels
- you leave your job
If you leave your job or change to a different personal pension, the money your employer paid stays in your pension fund unless you have it transferred to a different pension provider.
If you start or return to a job, your employer doesn't have to offer you a stakeholder pension scheme.
The Pensions Advisory Service helpline
The Pensions Advisory Service deals with general enquiries about personal, stakeholder and workplace pensions. Their advice is free and independent.
Getting financial advice
If you aren't sure if a stakeholder pension is suitable for you, ask for advice from an independent financial adviser. You may need to pay for their advice. Advisers must tell you if they recommend from the whole market, from a limited range of pensions or just one company's pensions.
- Getting information and help with pensions
- Find a financial adviser (your money adviser website)
- Unbiased - the home of professional advice (unbiased.co.uk website)