Stakeholder Pensions

Stakeholder pensions are a type of personal pension, and essentially follow the same rules. For more information on personal pensions see Personal Pensions. They are also money purchase schemes, offering savers the chance to invest their contributions and build up a pension fund they can use to purchase an annuity on retirement (see Annuities). Stakeholder pensions differ from regular personal pensions only in that there are stricter rules and regulations governing the way in which they are run.

A stakeholder pension scheme must:

• be a defined contribution scheme, that is, one which sets out the amount of money savers must invest each month
• have a low minimum contribution of £20 to enable all savers to contribute regularly
• offer a basic investment package, or 'default' package for savers who do not want to choose their investments individually
• employ trust managers to protect the individual savers' needs
• allow savers to transfer existing pension funds into this scheme
• not charge savers for transferring their pension fund to another stakeholder scheme
• not charge more than 1.5% of the total pension fund each year for management of the account
• employ an accountant who verifies the scheme is abiding by these rules

Stakeholder pension schemes are designed to enable people to save for retirement without being confused with complicated rules or penalised with high fund-management fees. You are able to make regular minimum contributions of about £20, or make lump sum contributions if you have extra money available, perhaps from a Christmas bonus. As with all personal pensions, you can contribute to a stakeholder pension whether you are employed, self-employed or unemployed. They offer security and flexibility to accommodate the different circumstances in which people find themselves. Personal pensions are a good idea for many people and for many reasons, but it is especially worthwhile to consider contributing to a stakeholder pension if you are not eligible for a full State Pension (see State Pensions), or have no other pension scheme into which you currently pay.

Stakeholder pensions are money purchase schemes. You contribute money to the scheme which creates a fund; the money is invested and any investment returns are added to your fund. Your pension scheme provider will also claim tax relief on the contributions you make: every contribution is seen as a 'net' contribution, and tax relief of 22% is claimed to recover the 'gross' value. This means you need only contribute £78 for £100 to be credited to your pension fund. If you are a higher rate taxpayer, paying 40% tax, you can claim a further 18% of tax relief through your tax return at the end of the year. For more information on pension tax including tax relief see Tax Incentives for Saving.

Upon reaching retirement your provider will use the pension fund to pay you an annual pension or use the fund to secure an annual pension from an insurance company. The insurance company may be recommended by your scheme provider, or you may wish to do independent research as to whom you sell your pension fund for a retirement income. You may need to pay tax on your annuity, depending on your total retirement income. However, you will also be offered a tax-free lump sum from your pension fund, normally equal to approximately 25% of the total value of the fund. Usually personal pensions enable you to begin claiming your annuity before State Pension Age (see State Pension Age), making it possible for you to retire early if you have built up a pension fund which will support your desired lifestyle. For details, see Leaving a Pension Scheme Early.

Although the money that you contribute to your pension is invested, you do not normally have to worry about making big losses. Your pension scheme provider should not invest any pension contributions in high-risk situations, and any investments at moderate risk will be carefully managed to ensure that the closer a pension saver comes to retirement, the lower the risks in any investments made. This may mean that for a time your contributions are invested in the stock market at a moderate risk, but later your pension fund is invested in government bonds known as gilts. Gilts are essentially certificates of investment or 'loans' to the government, issued by the Treasury, which are guaranteed by the government and offer fixed rates of interest with minimal risk: they are thus very secure investments. For more detailed information on investments, see Other Investment Opportunities. Stakeholder pensions may offer you the option of taking more control over your pension fund if you wish, enabling you to get involved with choosing the individual investments. You should remember that wherever investment is involved there is always a risk; you need to be aware that there is always a possibility that the worst could happen, and not rely on one savings fund to protect you from poverty in retirement.

If you have a very low income or are worried about losing your job, it may be inadvisable to begin investing in a private pension, because the money you invest will be inaccessible to you until you reach retirement age. This is a useful way of ensuring you will have money when you retire, because there is no way to spend it. However, if you have a low income or you lose your job and find you need to access your savings, you will not be able to access the money in your pension fund. If you feel you are at high risk of needing your savings fast in an emergency and you do not earn enough to save for a pension and create a separate contingency fund to finance unexpected costs, you should think carefully before you invest your money in a pension scheme for the long-term.

Stakeholder pensions are subject to rules set out by the government. The idea is that these more regulated pension schemes will encourage more people to save for their pension, because they are reasonably simple to understand and carefully monitored. Every stakeholder pension scheme is required to register with the Pensions Regulator, which ensures that the scheme is operating according to the guidelines. Any UK resident can join a stakeholder pension scheme, and once you have a savings account it is possible for anyone to make a contribution to it, including family members. You are allowed to invest in as many pension schemes as you wish, so you can choose to contribute to an occupational pension scheme (see Occupational Pensions) and a stakeholder pension. As a scheme member, you will be sent information on your pension fund at regular intervals, enabling you to keep track of your investment. If your employer has more than five employees, they are required to offer their workers a stakeholder pension or a suitable alternative. Usually your employer will also make contributions to your stakeholder pension, enabling your pension fund to grow at a faster rate.