Introduction to personal pensions Stakeholder pensions
Stakeholder pensions defined contribution personal pensions, although some employers offer them too.
These pension types differ from normal personal pensions because their charges are usually lower and they are more flexible. You can read about how pensions work in our guide, What is a pension?.
Stakeholder pensions have to meet minimum standards set by the government, which makes them different from personal pensions. These standards are:
- Limited charges – they can’t be more than 1.5% of the fund’s value for the first ten years, and 1% after that
- Low minimum contributions
- Flexible contributions – you must be able to stop and start payments when you want and switch providers free of charge
- Security standards – such as independent trustees
How stakeholder pensions work
You can purchase a stakeholder pension from pension providers, insurers or high street banks. The fund will be invested in stocks and shares, and unlike defined benefit pensions, you can choose from the range of funds to invest in. Once you reach retirement age, you'll either use income drawdown, buy an annuity or take the lot subject to taxation. Read more in our guide, income options under the new pension rules.
The amount you pay into your stakeholder pension can be as low as £20 per month, and you can pay monthly or weekly. You don’t even have to pay in regularly – you can contribute a lump sum whenever you want. There’s also no limit to the amount you can pay in.
This flexibility can be particularly useful if you’re self-employed, so you don’t have the pressure of monthly payments.
Tax and stakeholder pensions
The government will give you tax relief on your contributions, up to your annual allowance limit (£40,000 in 2016/17). Personal contributions paid to a stakeholder pension scheme are made net of basic rate tax (20%).
People who pay income tax at the higher rate (40%) may be able to claim back the tax difference from HMRC at the end of the tax year through self assessment or by contacting HMRC.
Company stakeholder pensions
Your employer can offer you a stakeholder pension, although since October 2012, they’re not obligated to offer them. Stakeholder pensions can also be used for auto-enrolment purposes – our guide to Auto-enrolment has more information.
Stakeholder managers or trustees monitor the contributions made by you and your employer, and you should receive regular updates on how much has been paid in and how the funds you’re invested in are performing.
- How to invest - Learn about portfolios and asset allocation
- How much money will I have in retirement? - How your different pension pots and benefits will add up
- The Which? Money Helpline - Get expert advice on your pension investments
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