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Stakeholder pensions are a type of personal pension. They have to meet certain government standards to ensure they are flexible and have a limit on annual management charges. The minimum payments are also low and you can stop and re-start payments whenever you wish.
Stakeholder pensions work in much the same way as other money purchase pensions. You pay money into your pension to build your pension fund.
The managers of the stakeholder pension scheme invest the pension fund on your behalf. The value of your pension fund will be based on how much you have contributed and how well the fund's investments have performed.
When you retire, you use the fund you have built up to buy an annuity (a regular income payable for life) from a life insurance company of your choice.
By law stakeholder pensions must meet a number of minimum standards to make sure they offer value for money, flexibility and security. The standards include:
You can now save as much as you like into any number and type of pensions, including stakeholder pensions. You get tax relief on contributions of up to 100 per cent of your earnings each year, subject to an 'annual allowance' (£225,000 for the 2007-2008 tax year).
In practice, this means that for every £78 you pay into your pension, you end up with £100 in your pension pot. If you're a higher rate taxpayer you can claim the extra tax back. Savings above the annual allowance will be subject to a tax charge.
If you don't pay tax, you can still get tax relief on your (or someone else's) contributions up to a certain limit.
A stakeholder pension could be a good choice if:
If you're an employee you can opt out of the additional State Pension and instead put the National Insurance payments which would have gone towards it into a personal pension, including a stakeholder pension.
If you still aren't sure if a stakeholder pension is right for you, seek expert advice from a financial adviser before making a decision. You may need to pay for this. Advisers must tell you whether they recommend from just one company's products, from a limited range of providers or whether they choose from the whole market.
You get a stakeholder pension from financial services companies such as insurance companies, banks, investment companies and building societies. Other organisations such as trade unions may also offer stakeholder pensions to their members.
If there are five or more employees where you work, but no staff company pension scheme, your employer should offer you access to a stakeholder pension scheme through the workplace. If you haven't been offered access to a scheme but are interested, ask your employer.
If you're an employer find out more about your legal obligations with regard to stakeholder pensions from the Business Link website.
The Pensions Advisory Service helpline deals with general enquiries about personal pensions, including stakeholder pensions, and occupational pensions. It is open Monday to Friday from 9.00 am to 5.00 pm on 0845 601 2923.
