Stakeholder pensions are defined contribution personal pensions but with more flexibility and lower charges than standard personal pensions. By Christian Leeming

 

Stakeholder pensions are individual contracts between you, the member, and the pension provider – often an insurance company or an investment platform, but also a number of other providers, including banks and building societies.

They differ from normal personal pensions because their charges are usually lower and they are more flexible, although they may offer a limited choice in terms of the funds you can invest in.

Stakeholder pensions may be offered by employers who may, or may not, make a contribution and can also be used for auto-enrolment purposes; some may choose to open a stakeholder pension to augment the income they expect to receive from a workplace pension and will receive regular updates on how much has been paid in and how the funds they are invested in are performing.

The amount you pay into your stakeholder pension can be as low as £20 per month, and you can pay monthly or weekly, which may be particularly attractive to those that are self employed, not working or without certainty of income.

There is no requirement to commit to regular contributions – you can contribute a lump sum whenever you want and there is no limit to the amount you can pay in up to your annual allowance.

The annual contribution allowance that is eligible for tax relief in 2022/23 is £40,000; any contributions in excess of that are subject to an annual allowance charge which will be added to your taxable income for the year, or may be deducted from your pension scheme thereby reducing your benefits.

The Government has laid down a set of conditions for stakeholder pensions to make them more accessible and to limit the amount of charges you have to pay:

 

  • limited charges – not more than 1.5% of the fund’s value for the first ten years, and 1% after that
  • low minimum contributions from £20 per month
  • flexible contributions – start and stop payments when you want and switch providers free of charge
  • security – measures such as the appointment of independent trustees

 

Stakeholder pensions are portable which means that if you change jobs, or stop working, you can continue contributing to the scheme, and, if you join a new employer, they may also decide to contribute to it.

This flexibility extends to allowing the member to contribute to other people’s stakeholder pensions such as that of a partner, or even to one established on behalf of a child to allow them to start building up retirement benefits from an early age.

 

Drawing Pension Benefits

 

Stakeholder pensions are money purchase schemes and the value of your retirement benefits are determined by:

 

  • the amount of contributions that have been made
  • the period that each contribution has been invested
  • investment growth over this period
  • charges incurred

 

Under current legislation, you can commence drawing retirement benefits from the age of 55 and regardless of whether you are still working; up to 25% of your accumulated fund can be withdrawn as a tax-free cash lump sum with the balance used to provide an income.

Options for taking income in retirement are explored elsewhere on this site.

The precise amount of income you receive depends on the options you select when taking out the product. These include income continuing to be paid to a dependant in the event of your death, income increasing each year to offset the effects of inflation and the frequency at which the income is paid.





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