Stakeholder pension guide

Stakeholder pensions were launched by the Government in April 2001 to encourage people who aren’t eligible to join a company scheme to save for their retirement through a simple, low cost and flexible personal pension.

A set of minimum standards was established for stakeholder pensions in order that consumers would know exactly what to expect from these pension arrangements.

The contribution limits and tax advantages of a stakeholder pension are identical to those of a Personal Pension or Self Invested Personal Pension or Sipp.

You can invest up 100 per cent of your earnings subject to a limit of £255,000 in the tax year 2010-11.

Is there a limit to how much I can hold in a stakeholder pension?

If the total value of all your pensions exceeds the lifetime allowance (at the time you take your pension), there will be a charge on the excess over the lifetime allowance of 25 per cent if  taken as income, and a 55 per cent charge if taken as cash.

The lifetime allowance will rise each year as follows:

Tax Year 2008/09    -  £1.65 million

Tax Year 2009/10    -  £1.75 million

Tax Year 2010/11    -  £1.80 million

 
Which companies offer stakeholder pensions?

Stakeholder pensions are offered by insurance companies, such as Aviva, AXA, Legal & General, Scottish Widows and Standard Life.

Who can contribute to 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.
In most cases, 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 also open a stakeholder on behalf of a child.

How much can I contribute to a stakeholder pension?

The minimum contribution which can be made to a stakeholder pension is £20 gross a month. You can pay in contributions on a regular basis or make occasional lump sum payments and increase these at any time.

What are the costs of a stakeholder pension?

Only one charge can be made against a stakeholder pension - the Annual Management Charge (AMC).

The AMC covers the administration and management of the plan. For the first ten years of the contract, the AMC cannot exceed 1.5 per cent per annum of the fund value. From ten years onwards, the AMC limit falls to 1per cent per annum.

What can a stakeholder pension invest in?

Stakeholder pensions can invest in the unit-linked pension funds offered by the insurance company of your choice. Typically a stakeholder pension provider will offer around a dozen funds to choose from, although some, such as Legal & General offer over 50. Some providers also offer  funds from external fund managers.

The range of funds typically covers the following fund types:

§  Risk-based managed funds, e.g. cautious, balanced

§  UK and overseas equity funds

§   Index tracker funds

§   Cash funds

§   Gilt and fixed interest (bond) funds  

What if I don't know what investment fund to select? Stakeholder pension providers must offer a ‘default’ fund for investors who do not wish to make 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, such as bonds and cash, thereby providing greater security as you approach retirement.

Are there any charges for changing my investment choice or contribution level

You can switch between the investment funds of your provider at any time, without cost. There are also no penalties for stopping, or reducing contributions, and you can transfer to another stakeholder provider without charge at any time.

What happens to my stakeholder when I die?  

The full value of your Stakeholder Pension will 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).

If you have no dependants, the fund will be paid to your estate.

When can I take the benefits from my stakeholder pension?

 You can take your stakeholder pension benefits any time between age 50 and 75, even if you're still working. From 6 April 2010, however, the minimum age at which you can normally start taking your pension will rise from age 50 to 55.

How can I take the benefits from my stakeholder pension?

  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 life;

§  take up to 25 per cent of your fund as a tax-free cash lump sum, and using 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 other dependant after you die;

§   choose whether you want your pension to remain level throughout your life or to increase automatically each year (known as escalation);

§  delay the purchase of an annuity, but still take up to 25 per cent tax free cash and a taxable income (if you want) via an Unsecured Pension, while leaving the balance of your fund invested in the stock market.