Stakeholder pensions

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

Your contributions are 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:

Pension investment options – an overview

Stage 2 – When you retire

Under government proposals, due to come into effect from April 2015, you will be able to access and use your pension pot in any way you wish from age 55. You will be able to:

  • Take up to 25% tax free
  • Convert some or all of the rest into a regular retirement income (known as an annuity), and/or
  • Withdraw the remaining cash in stages or as one lump sum, subject to tax at your highest rate

Between 27 March 2014 and 6 April 2015 interim rules apply that give you more choice than previously for how much of your pension pot you can cash in.

New rules about pensions from 27 March 2014

The size of your pension pot and amount of income you get when you retire will depend on:

  • How much you pay into your pension pot
  • 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 pot by your pension provider
  • How much you take as a cash lump sum
  • Annuity rates at the time you retire – if you choose the annuity route
  • A ny other type of retirement income you choose

When you retire, your pension provider will offer you a retirement income (an annuity) based on your pot size, but you don’t have to take this and it isn’t your only option. In view of the proposed changes from April 2015 it might make sense to delay taking your pension until then. Or, if you can’t afford to delay and are unsure about taking out an annuity, income drawdown might be a temporary option. Always get advice before deciding what to do. If after getting advice you think an annuity is right for you, always shop around for a better rate.

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

Annuities and other types of retirement income

When and where to get pensions help and advice

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.