Stakeholder pensions

The rules for how you can access your pension pots were made more flexible from 27 March 2014, and will be made even more flexible from April 2015. This article will shortly be updated to reflect those changes and their effect on annuities. For more details read our guide New rules about pensions from 27 March 2014.

Stakeholder pensions are a form of defined-contribution personal pension. They have low and flexible minimum contributions, capped charges and a default investment strategy if you don’t want too much choice. Some employers offer them, but you can start one yourself.

How stakeholder pensions work

Minimum standards

Stakeholder pensions must meet minimum standards set by the government. These include:

  • limited charges
  • low minimum contributions
  • flexible contributions
  • penalty-free transfers
  • a default investment fund – your money will be invested into this if you don't want to choose

It helps to think of defined-contribution pensions as having two stages.

Stage 1 – While you are working

The fund is usually invested in stocks and shares, along with other investments, with the aim of growing the fund over the years before you retire. You can usually choose from a range of funds to invest in. Remember though that the value of investments may go up or down.

If you need help with deciding how to invest your contributions, follow the links below:

Stage 2 – When you retire

When you retire you can take a cash lump sum from your fund and convert the rest into a retirement income (also known as an annuity).

The amount of income you’ll get will depend on:

  • how much you pay into the fund
  • how long you save for
  • how much, if anything, your employer pays in
  • how well your investments have performed
  • what charges have been taken out of your fund by your pension provider
  • how much you take as a cash lump sum
  • annuity rates at the time you retire
  • the type of retirement income you choose

Your pension provider is likely to offer you a retirement income based on your fund, but you don’t have to take this. You should always shop around for a better rate.

Get more information about converting your pension fund into retirement income by reading our guide below.

Setting up a stakeholder pension

If a stakeholder pension is offered through your employer, they will have chosen the pension provider and may also arrange for contributions to be paid from your wages or salary. The employer may contribute to the scheme. The pension provider claims tax relief at the basic rate and adds it to your fund. If you are a higher or additional-rate taxpayer, you'll need to claim the additional rebate through your tax return.

You can also set up a stakeholder pension for yourself. Their flexibility, low minimum contributions and capped charges can be of particular benefit if you’re self-employed or on a low income.

Changing jobs

If you change jobs, you should check to see if your new employer offers a pension scheme. You can continue paying into an existing stakeholder pension but you may find you'll be better off joining your new employer's scheme, especially if the employer contributes. Compare the benefits available through your employer's scheme with your stakeholder pension.

If you decide to stop paying into a stakeholder pension, you can leave the pension fund to carry on growing, mainly through investment growth, but check to see if there are extra charges for doing this.