Guides: pensions
Stakeholder pensions
Stakeholder pensions were launched by the Government in April 2001 to encourage people who were not eligible to join a company scheme to save for retirement. A set of minimum standards was established so that consumers would know exactly what to expect but essentially the contribution limits and tax advantages of a stakeholder pension are identical to those of a personal pension or a self invested personal pension.
Am I eligible for a stakeholder pension?
To have a stakeholder pension you must be under 75 and a resident in the UK, or a Crown servant or the spouse or registered civil partner of a Crown servant. You can also open a stakeholder pension on behalf of a child.
Paying into a stakeholder pension
You can pay into a stakeholder pension if you are employed, a fixed contract worker, self employed, not working or taking a career break.
You can invest, and receive tax relief on, up to 100% of your earnings, subject to a limit of £255,000 gross in 2010-11. The minimum contribution is £20 a month before tax or 'gross'. You can make regular payments or make occasional lump sum payments and increase these at any time.
Associated costs
Management charge: You can expect to pay an Annual Management Charge (AMC) for your stakeholder pension. This covers the administration and management of the pension and the funds held within it. The maximum charge is set by the Government and for the first 10 years that you have your pension, it cannot go over 1.5% of your pension fund value per year . From the tenth year onwards this falls to 1%.
Charges if you exceed your lifetime allowance: If the total value of all your pensions exceeds your lifetime allowance, at the time you take your retirement benefits, you may need to pay a charge on the excess value over and above this allowance. If you take your pension benefit as an income, this will be at a rate of 25%. If you take it as cash, it will be 55%.
Switching pension providers or funds: You can switch between the investment funds of your pension provider at any time, without any associated costs. There are also no penalties for stopping, or reducing contributions, and you can transfer to another stakeholder pension provider at any time without charge.
Underlying investments
The funds you can invest in will vary according to pension provider and ranges from 20 to 40 funds or more. Some providers also offer funds from external fund managers, or funds that sit outside their own funds.
When you set up your pension, you can choose a 'risk profile' that suits your individual circumstances. For example, you could select a 'cautious' profile or a 'risky' profile. Most stakeholder pension providers offer a ‘default’ fund for investors who don't want to make these investment decisions. The default fund should be subject to ‘lifestyling’, which means that during the years leading up to retirement the fund will gradually be shifted into less volatile investments so they are more likley to provide greater security as you approach retirement.
Taking stakeholder pension benefits
You can take your stakeholder pension benefits at any time between age 55 and 75 (or 77 for those reaching 75 after 22 June 2010), even if you're still working.
At your selected pension date you will have a number of options:
Use your entire stakeholder pension fund to buy an annuity, which will give you a regular taxable income for the rest of your life;
Take up to 25% of your stakeholder pension fund as a tax-free cash lump sum and use the balance to provide a (reduced) taxable pension for life via an annuity;
Give up part of your pension to provide a taxable pension for your spouse, registered civil partner or another dependant after you die;
Choose whether you want your pension to remain level (stay the same) throughout your life or to increase automatically each year (escalate);
Delay the purchase of an annuity but still take up to 25% tax free cash and a taxable income (if you want) via an unsecured pension while leaving the balance of your fund invested in the stockmarket.
Passing on stakeholder pension benefits upon death
Before the age of 75 or after you die, the full value of your stakeholder pension will normally be used to provide a cash lump sum for your dependants, (unless part of it has to be used to buy a pension for your spouse or registered civil partner). This could happen if you have a separate fund called a ‘protected rights’ fund because you've contracted out of the State Second Pension (formerly known as SERPs).
