What is a Stakeholder Pension Plan?

Introduced in April 2001, Stakeholder pensions are a low cost and flexible method of saving for your retirement.

They have low minimum contribution levels and do not penalise policyholders if they need to stop paying contributions or move their funds to a new provider.

They are money purchase pensions and have to meet minimum standard laid down by the government.

When can it be used?

Stakeholders are sometimes offered by employers, or an individual can start one themselves.

They are used for building up money which is then generally used to provide an income in retirement.

Main features

Stakeholder Pension Plans are subject to minimum standards laid down by the government, these are as follows:

  • A simple transparent charging structure limited to 1.5% of the fund value for the first 10 years and 1% thereafter
  • A minimum contribution of no more than £20
  • Members can stop, start and vary contributions without penalty
  • There must be no additional charges for transfers in or out
  • Each stakeholder scheme has to offer a clear default investment choice

Stakeholder pensions are sometimes provided by an employer or they can be taken out individually.

If taken out individually you choose the provider of the plan and contributions are made net of basic rate tax, which means that you will only actually contribute £80 for every £100 of contributions paid.

Higher rate and 50% taxpayers also make contributions net of basic rate tax and can then claim additional relief via their Self Assessment return.

Tax relief will be granted on personal contributions subject to the greater of:

  • £3,600 gross per annum; and
  • 100% of relevant earnings limited to £50,000 from 6th April 2011  (salary, bonuses and benefits in kind)

If you are in a scheme run by your employer, they will have chosen the pension provider and they may have arranged for contributions to be paid from your wages or salary. The employer may also contribute to the scheme although they are not currently obligated to do so. Your employer deducts contributions from your pay and sends them to the pension provider. The pension provider claims tax relief at the basic rate and adds it to your fund. If you are a higher rate or 50% taxpayer, you will need to claim the additional rebate through your tax return.

However you access a Stakeholder, you will be able to choose from a range of funds to invest in, with the aim of growing the size of your pension pot over the years to retirement. The fund will grow with no liability to tax on capital gains and all forms of investment income, except dividends, will be tax free.

The value of the fund which has been built up to provide you with retirement benefits will be payable should you die before taking your benefits. This lump sum would normally be paid free of Inheritance Tax.

From April 2010, the plan can be accessed from age 55.

When you retire you can take a tax-free lump sum from your fund and use the rest to secure an income, using whichever method is suitable for your circumstances and attitude to risk.  The most common way of taking an income is to purchase a Lifetime Annuity, but there are several different ways in which you can potentially benefit from the funds you have accumulated.  The amount of pension income you’ll get will depend on:

  • How much you pay into the fund
  • How much, if anything, your employer pays in
  • How well your investments have performed
  • What charges have been taken out of your fund
  • How much you take as a tax-free lump sum
  • The type of pension income product you choose
  • Annuity rates at the time you retire

Advantages

  • Contributions receive tax relief
  • The fund will grow with no liability to tax on capital gains
  • Stakeholder Pension Plans sometimes have lower charges than a Personal Pension Plan or Self Invested Pension Plan
  • Stakeholder plans are flexible with no penalties for stopping and starting contributions or retiring early
  • The minimum contribution levels required to start a Stakeholder are low
  • Lump sum death benefits are normally payable free of Inheritance Tax
  • At retirement you have the option to take up to 25% of the fund as a tax-free cash lump sum

Disadvantages

  • Stakeholder Pension Plans typically have a more limited fund choice and restricted investment solutions compared to Personal Pension Plans or Self Invested Pension Plans
  • Once money has been paid into a Stakeholder Plan it cannot be accessed until age 55 at the earliest
  • If legislation were to change then charges could rise in the future

Next Steps

Making the decision between the various options you have to save for retirement requires careful consideration and full knowledge of all the choices available to you. At Investment Sense we believe in providing you with as much help as possible to make your decision.

If you have existing pension funds, then take advantage of our free pension review service, where we will project the possible future values of your pensions funds, click here to learn more about our Pension Review Service.

If you would like advice on this important area of your financial planning, we offer initial meetings with no cost or obligation. We will prepare a report into your options and present it to you, allowing you to make an informed decision.

Should you wish to make an enquiry or receive advice please complete the enquiry form on this page or call us on 0845 074 7778.