The Stakeholder Pension

A Stakeholder Pension is a new flexible and low cost savings scheme.  The scheme comes in the form of a money purchase pension that can be used to improve a person’s income in the later stages of life.

Stakeholder Pensions can be either occupational or personal schemes.  This means that while some employers offer them, it is also possible for an individual to start one independently.  These pensions have to meet strict minimum Government standards. These include:

• Limited charges – the charges levied by providers or managers of such schemes in order to cover their costs and provide a profit are limited to being no more than 1% of the value of the pension fund for each year. However, any plans set up on or after 6 April 2005 will attract an increased annual management charge of 1.5% for the first ten years and 1% thereafter.  Any additional services, such as personal financial advice can attract an additional charge on the proviso that they are agreed with the policyholder in advance and are not compulsory for joining the scheme;
• Low minimum contributions –  the minimum sum for contribution that the provider or manager can require cannot exceed £20;
• Flexible contributions – policyholders are permitted to contribute regularly or occasionally to suit their particular situation.  It is generally better to develop a regular saving habit; however a temporary break will not attract any penalty.  A minimum of one month’s notice must be provided for stopping contributions if they are paid through an employer (who is permitted to allow changes no less than every 6 months);
• Penalty-free transfers – should a policyholder wish to transfer any sums saved to a new scheme, they can do so without any charge being made by the existing scheme.  No charge can be made by the new scheme for accepting the transfer if it is also a stakeholder scheme and a person may find that it is of benefit to join the new employer’s scheme.  If they wish to continue to contribute to the existing stakeholder scheme, the relevant conditions will need to be checked.

Money purchase pensions are those that are built up through plan holder contributions, investment returns and tax relief and are best thought of as consisting of two stages:

Stage 1

The pension fund is invested in a variety of investments including stocks and shares with a view to maximising the growth of the fund in the years prior to retirement.  Plan holders will normally have a range of funds in which to invest but should be aware that the value of any investments may rise or fall.

Stage 2

Upon retirement a plan holder can withdraw a tax-free lump sum from the pension fund, using the remainder to secure a regular income for the remainder of their life, usually by purchasing a lifetime annuity.  A number of factors will determine the amount of pension income received including:

• How much is paid into the fund
• How much, if anything, the employer pays in
• How well the investments have performed
• What charges have been taken out of the fund by the pension provider
• How much is withdrawn as a tax-free lump sum
• Annuity rates at the time of retirement
• The type of annuity chosen

A Stakeholder Pension is a good starting place for someone wanting to make pension provisions but who cannot guarantee a large amount of money to set aside per month.  As your situation changes, you can easily transfer your Stakeholder in to a personal pension, which for a larger monthly contribution, allows you with a greater scope of choice.

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