Stakeholder pensions are a typeof personal pension and work in a similar way to other money purchase pensions. They are available to anyone under the age of 75 and can be bought from insurance firms, banks and investment organisations.
Once you pay money into a pension, the managers of the stakeholder pension scheme invest the pension fund on your behalf. When you come to retire the amount payable depends on the amount of money that you have paid into the scheme, and how well the investment funds have performed. You can take a 25% tax-free cash lump sum and use the remainder of the fund to buy an annuity when you come to retire.
Stakeholder pensions do differ from personal pensions because they must meet a number of minimum standards to ensure they offer good value for money, flexibility and security.
For a start, annual management charges are capped at 1.5% a year for the first ten years and 1% after that.You can also switch to a different provider without your current provider charging you, and you can start contributions from as little as £20 – this can be paid weekly, monthly or at less regular intervals. You won’t be charged any penalty fees for stopping, restarting or changing your contributions whenever you want. The scheme must also be run by trustees or by an authorised stakeholder manager to make sure the scheme meets legal requirements.
Tax relief on stakeholder pensions is the same as for other money purchase pensions. If you have no earnings or earn less than £3,600 per annum, you can still pay into a pension and qualify for tax relief. The maximum you can pay is £2,880 per annum, add tax relief which makes it up to £3,600 per annum. For anyone else you can pay 100% of your earnings or up to £40,000 annual allowance whichever is lower.
Is a stakeholder pension right for me? Stakeholder pensions can be a good idea if:
If you work for a company that has five or more employees, then the company has a legal obligation – if they do not offer an existing pension to their workers – to provide you with access to a stakeholder pension workplace scheme. From April 2019 your employer has to contribute a minimum of 3% into your workplace scheme, and you have to contribute a minimum of 4%. Joining a stakeholder pension firm does not disqualify you from the new State pension – it is designed simply to supplement it. The older you are, the more important it is to keep up your contributions, and to pay in as much as you can afford.
If you do take up a stakeholder pension scheme at work, your employer is legally obliged to supply you with an annual statement of all contributions and the pension’s current value, as well as supply a forecast of what potentially the pension could be worth when you retire.
The self-employed are very much a target group for wider stakeholder pension take-up. Many self-employed people will not receive the State Second Pension, which acts as a top-up to supplement basic state provision.
Unlike people paid by Pay As You Earn(PAYE), self-employed people do not receive instant tax relief on their pension contributions; instead the relief is returned into the pension after they have completed – and HMRC approved – their end-of-year tax return. The tax relief is certainly worth taking advantage of. For more information about the tax advantages of stakeholder pensions see our Tax Guide.
Stakeholder pension contributions can be stopped and started at any time, as well as increased or cut, depending on your circumstances – this flexibility often ideally suits the self-employed.
Parents and relatives can set up a stakeholder pension scheme as an investment on behalf of a child, even though children do not earn an income you can still contribute up to £2,880 net into a pension which you will get added tax relief on of 20% making it up to £3,600gross.
The stakeholder pension should be set up in the child’s parent or guardian’s name. The child will take control of the pension once they reach 18but will not have access to the money until they are 55 years old (increasing to 57 in 2028).
This is of course, a very long-term investment, however if you invest the full amount for 18 years, and assuming the fund grows by 7% per year, by the time they reach the age of 65, the child could possibly have a pension fund of £3.1 million.
You can also request contact details from the Pension Tracing Service by phone or by post.
The Pension Tracing Service
Telephone: 0800 1223 170
From outside the UK: +44 (0) 1782 389134
Monday to Friday, 9:00 am to 5:30 pm
The Pension Tracing Service
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