Generally cheaper and more straightforward than most personal and company pensions. Designed to encourage those less familiar with investing to save for retirement.
Stakeholder pensions are known as defined contribution or money-purchase pension plans. This means that the money you contribute buys units in one or more pension funds and is invested to build up retirement savings. The value these investments generate is then usually used to provide you with a lump sum and income (i.e. a pension) when you retire.
You can get stakeholder and other personal pensions from a range of pension providers including life insurance companies, some high street banks, investment firms and some retailers (e.g. supermarkets). You can also get them online. You can start a stakeholder pension as long as you’re under the age of 75.
What are the key benefits?
As well as the usual tax benefits that all pensions offer, the key benefits of stakeholder pensions include:
- Low costs - The government has capped stakeholder charges. The maximum you’ll pay is 1.5% a year of the value of the pension plan for the first 10 years of its life and 1% a year after that. Some providers charge less than the maximum
- Low minimum contributions - You can pay in from as little as £20 a month
- Flexibility - You decide how much you contribute and how often beyond the £20 monthly minimum contribution. Investments can be made as lump sum or regular payments and you can alter how much you pay in as you circumstances change. There’s also the ability to stop contributions, without penalty
- Portability - You can transfer stakeholder pensions to another type of pension plan, or to another stakeholder pension provider – and you won’t pay a penalty. With some other types of pension, you’d pay a penalty for doing this
- Simplicity - If you’d rather not choose your own fund(s), you’ll be automatically allocated a default one. However, the choice of default funds available is often limited
- Security - Stakeholder pension schemes are run by trustees or an authorised stakeholder manager. It’s their job to ensure the scheme meets all the legal requirements
- Stakeholder pensions are available to everyone - The low cost of stakeholder pensions puts them within reach of most investors – even children can invest in one.
How much will I get?
The amount of income your stakeholder pension will pay you when you retire depends on:
- How much you save into it
- The performance of your chosen funds over time, after taking account of the charges you’ll pay
- The amount that you withdraw as a tax-free lump sum
- Whether you also decide to withdraw taxable lump sums, or leave your pension invested and withdraw an income over time
- If you purchase an annuity, the rates at the point that you purchase it.
Is a stakeholder pension right for me?
Stakeholder pensions offer low charges, but your choice of investment funds can be limited as a result. For this reason, despite the higher charges they attract, many people choose to invest in a personal pension or Self Invested Personal Pension.
- Please be aware that tax rules can change and the value of tax relief will depend on your individual circumstances.
- SIPPs are not for everyone. You need to have the necessary skills to invest your own pension fund as the value of investments can fluctuate and you could get back less than you invested.