Generally cheaper and more straightforward than most personal and company pensions, stakeholder pensions are designed to encourage you to save towards your retirement.
Stakeholder pensions are "money purchase" pension plans. This means that the money you contribute is invested to build up a fund, which is used to provide you with a lump sum and income (i.e. a pension) at retirement. Your investments buy units in one or more pension funds.
You can get stakeholder and other personal pensions from a range of "pension providers" including life insurance companies, high street banks, investment firms and some retailers (e.g. supermarkets). You can also get them online - and they can be taken out by any UK resident up to the age of 74.
As well as various tax benefits that all pensions offer, the key benefits of stakeholder pensions include:
- Low cost - 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 per month
- Flexibility - You decide how much and how often you want to contribute beyond the £20 per month minimum. Investments can be lump sums or regular payments and you can alter your premium (the amount you pay in). And if you want to stop contributions, you can – 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 default funds available are often limited
- Security - Stakeholder pension schemes are run by trustees or an authorised stakeholder manager. It’s his or her job to ensure that the scheme meets all legal requirements
- 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 will depend on:
- How much you save
- The performance of your chosen funds over time, after taking account of the charges you’ll pay
- The size of any pension commencement lump sum you take at retirement
- The annuity rate when you start drawing your pension, or the rate applying to whichever arrangement you use to convert your pension fund into a regular income.
Is it for me?
Stakeholder pensions offer low charges, but your choice of investment funds can be limited as a result. For this reason many people choose to hold a Personal Pension
instead, although the charges on these are higher.