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Stakeholder Pensions

Money : Back To Basics

A stakeholder pension is simply a low cost personal pension plan. The Government launched them in April 2001 in a drive to encourage more people to save for their own retirement.

The charges that can be imposed on a stakeholder pension plan are capped by legislation. To meet the charging standards for a stakeholder pension the plan must have a maximum charge of 1.5% per year for the first ten years and then 1% per year thereafter. There cannot be any initial charges or exit penalties (for transferring to another provider).

If you started a stakeholder pension before 6th April 2005 you will have benefited from a pension plan with even lower maximum charges than this! The previous maximum charge was 1% per annum for the entire life of the stakeholder pension.

Another rule that stakeholder pensions have to follow is that they must allow a minimum contribution of ?20 ? either monthly or on an ad-hoc basis. Some stakeholder pensions have a lower contribution requirement than this. You can stop, start, raise or lower your pension contribution in a stakeholder pension without additional charge or penalty.

Making contributions

The level of contributions that you can make into a stakeholder pension depends very much on your personal circumstances.

Your earnings and your age determine the maximum contribution that you can make into a stakeholder pension each year. The older you get, the more you are allowed to contribute into your stakeholder pension. It is also possible to declare a ?basis year? ? a year in the past five years ? where you had higher earnings that you can make into a stakeholder pension plan.

In order to be eligible to contribute into a stakeholder pension you cannot be a member of an occupational pension scheme at the same time. There is an exception to this rule, something we call partial concurrency. This is where somebody can be a member of an occupational pension scheme and makes contributions into a stakeholder pension scheme (up to a limit of ?3,600 per year), as long as their salary is less than ?30,000. This makes stakeholder pensions a viable alternative to Additional Voluntary Contribution (AVC) pension schemes.

Non-earners can contribute up to ?3,600 per year into a stakeholder pension scheme. This means that even children can have stakeholder pensions and receive basic rate tax relief (even though they are non-earners) when contributions are made into their stakeholder pension scheme by a relative or third party.

In terms of tax-relief ? everybody gets basic rate tax relief of 22% on their stakeholder pension contributions. If you are a higher rate taxpayer for income tax purposes then you also receive higher rate tax relief. This is achieved by adding the total gross pension contribution (after basic rate tax relief is added) to your basic rate tax band. Doing this means that more of your income falls into the basic rate tax bracket and less falls into the higher rate tax bracket.

Investing your stakeholder pension

When you make contributions into a stakeholder pension you get to decide how you would like to invest this money. Most stakeholder pensions offer access to a limited range of investment funds covering the four main asset classes ? cash, fixed interest securities, equities and property. This allows you to take as much or as little risk as you feel comfortable with when you invest your stakeholder pension.

Remember that the value of your stakeholder pension fund can go down as well as up!

The stakeholder pension fund grows in a tax efficient environment, although it is no longer possible for pension schemes to recover the 10% tax credit payable on UK dividend income.

Some stakeholder providers offer access to more investment funds than others, but very few offer an extensive range of investment funds as a result of the charging limits. This is a reason that people with more sophisticated investment requirements might consider a conventional personal pension plan or Self Invested Personal Pension (SIPP) as an alternative to a stakeholder plan.

If you don?t want to make your own decision about how to invest your stakeholder pension fund then you don?t have to. All stakeholder pensions have to offer a default investment options for people who do not want to make a decision about investment for themselves. Stakeholder pension often have ?lifestyle? investment strategies on offer; where the investment risk is automatically reduced as you get closer to retirement to try to prevent any large capital losses in the value of your pension fund when you have less time for the investments to recover in value.

Reaping the rewards of a stakeholder pension

The main motivation for building up a stakeholder pension fund is likely to be to provide an income in retirement. You can take retirement benefits from your stakeholder pension at any time between age 50 (rising to 55 by 6th April 2010) and age 75.

Retirement benefits from a stakeholder pension typically take the form of an annuity purchase. This is a financial instrument that converts your pension fund into a secure income for the rest of your life. This income is taxed as earned income.

You do not have to use your entire stakeholder pension plan to buy an annuity. In fact, you are allowed to take up to 25% of your pension fund as a tax-free cash lump sum when you decide to take retirement benefits.

Stakeholder pensions and employers

Since October 2001 it has been mandatory for all employers with five or more employees (including part-time staff) to provide access to a stakeholder pension. An employer can be exempt from this requirement if they offer membership of an occupational pension scheme and satisfy a number of requirements in terms of access or contributions.

If this applies to your employer then they have to go through a process known as ?designation?. This essentially means selecting a suitable stakeholder pension provider and then offering their staff access to this plan. This doesn?t mean that your employer has to make a contribution into the stakeholder pension plan. However, they must offer you the option to deduct your contributions from your salary and pay it directly into the pension arrangement, if you ask them to.

Where can I go for more information?

An excellent resource to find out more about stakeholder pensions is the website for The Pension Service at www.thepensionservice.gov.uk

If you are considering a stakeholder pension you need to seek professional independent financial advice.

Disclaimer:

This publication is provided for general consideration only and the information contained herein is not to be acted upon without professional independent financial advice. Neither Informed Choice Ltd nor any author can accept responsibility for any loss occasioned to any person no matter howsoever caused or arising as a result of or in consequence of action taken or refrained from in reliance of the contents hereof. Informed Choice Ltd are independent financial advisers and is authorised and regulated by the Financial Services Authority.

Martin Bamford DipPFS AIFP
Director
Informed Choice Ltd


By: Martin Bamford on Fri, Aug 12th 2005

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