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Stakeholder pension guide
Stakeholder pensions were launched by the Government in April 2001 to encourage more consumers to save for their retirement through a simple, low cost and flexible personal pension.
A prescribed set of minimum standards was established for stakeholder pensions in order that consumers would know exactly what to expect from these pension arrangements.
The contribution limits and tax advantages of a stakeholder pension are identical to those of a Personal Pension or Self Invested Personal Pension or Sipp. You can invest up 100 per cent of your earnings subject to a limit of £215,000 in the tax year 2006-07. This limit will rise each year by £10,000 to £255,000 gross in 2010-11. Back to top
Is there a limit to how much I can hold in a stakeholder pension?
Since 6 April 2006, there has been a tax free lifetime allowance of £1.5m that you can hold in total in all your pensions, after which you will be taxed on the excess, at 25 per cent on any lump sum you take and at your marginal rate (22 per cent or 40 per cent) on any income you take over the lifetime allowance.Back to top
Which companies offer access to stakeholder pensions?
Stakeholder pensions are offered by insurance companies, such as Clerical Medical, Legal & General, Scottish Widows and Standard Life. Back to top
Who can contribute to a stakeholder pension?
To have a stakeholder pension you must be under 75 and a resident in the UK, or a Crown servant or the spouse or registered civil partner of a Crown servant.
In most cases, you can pay into a stakeholder pension if you are employed, a fixed contract worker, self-employed, not working or taking a career break. You can also open a stakeholder on behalf of a child. Back to top
How much can I contribute to a stakeholder pension?
The minimum contribution which can be made to a stakeholder pension is £20 gross a month. You can pay in contributions on a regular basis or make occasional lump sum payments and increase these at any time. Back to top
What are the costs of a stakeholder pension?
Only one charge can be made against a stakeholder pension and this is known as the Annual Management Charge (AMC). The AMC covers the administration and management of the plan.
For the first ten years of the contract, the AMC cannot exceed 1.5 per cent per annum of the fund value. From ten years onwards, the AMC limit falls to 1per cent per annum. Back to top
What can a stakeholder pension invest in?
Stakeholder pensions can invest in the unit-linked pension funds offered by the insurance company of your choice. Typically a stakeholder pension provider will offer around a dozen funds to choose from, although some, such as Legal & General offer many more. Some providers also offer access to externally managed funds from other fund managers.
The range of funds typically covers the following fund types:
- Risk-based managed funds, e.g. cautious, balanced
- UK and overseas equity funds
- Index tracker funds
- Cash funds
- Gilt and fixed interest (bond) funds
With help from your financial adviser, or by using the fund information and research tools available from product providers, you need to ascertain your attitude to risk and the target income you wish to achieve for your retirement and select appropriate investment funds accordingly. Back to top
What if I don't know what investment fund to select?
Stakeholder pension providers must offer a ‘default’ fund for consumers who do not wish to make investment decisions. The default fund should be subject to ‘lifestyling,’ which means that during the years leading up to retirement, your fund is gradually moved into less volatile investments, therefore providing greater security as you approach retirement.
Additionally providers give access to ‘lifestyle’ portfolios, which are investment strategies designed to meet your individual circumstances – for example, to reflect your age, the length of time until you retire and your attitude to risk. Back to top
Are there any charges for changing my investment choice or contribution level?
You can switch between the investment funds of your provider at any time, without cost. There are also no penalties for stopping or reducing contributions and you can transfer to another stakeholder provider without charge.Back to top
What happens to my stakeholder when I die?
The full value of your stakeholder pension will normally be used to provide a cash lump sum for your dependants, unless part of it has to be used to buy a pension for your spouse or registered civil partner. (This could happen if you have a separate fund because you've contracted out of the State Second Pension).Back to top
When can I take the benefits from my stakeholder pension?
You can take your stakeholder pension benefits any time between age 50 and 75, even if you're still working. From 6 April 2010, however, the minimum age at which you can normally start taking your pension will rise from age 50 to 55.Back to top
How can I take the benefits from my stakeholder pension?
At your selected pension date you will have a number of options to choose from, including:
- using your entire stakeholder pension fund to buy an annuity which will give you a regular taxable income for life;
- taking up to 25 per cent of your fund as a tax-free cash lump sum, and using the balance to provide a (reduced) taxable pension for life, via an annuity;
- giving up part of your pension, to provide a taxable pension for your spouse, registered civil partner or other dependant after you die;
- choosing whether you want your pension to remain level throughout your life or to increase automatically each year (known as escalation);
- delaying the purchase of an annuity, but still taking a taxable income by taking an Unsecured Pension.