The simplest pensions, these are designed to encourage lower earners to save for their future and are subject to restrictions on charging, meaning they can be a cheap and efficient way to start saving. Because of the cost limits, the range of investments might be restricted, as may some of the additional options, but you will usually find index tracker-type funds and multi-asset managed funds which will suit most people’s basic needs.
Stakeholder pensions are a form of defined contribution personal pension. They have low and flexible minimum contributions, capped charges and a default investment strategy if you don’t want too much choice. Some employers offer them, but you can start one yourself.
How Stakeholder Pensions work
Minimum standards
Stakeholder pensions must meet minimum standards set by the government. These include:
- Limited charges.
- Charge-free transfers.
- Flexible contributions.
- Low minimum contributions.
- A default investment fund – your money will be invested into this if you don’t want to choose.
It helps to think of defined contribution pensions as having two stages.
Stage 1 - while you are working
Your contributions are usually invested in stocks and shares, along with other investments, with the aim of growing the fund over the years before you retire. You can usually choose from a range of funds to invest in.
Remember though that the value of investments might go up or down.
Stage 2 - when you retire
Once you stop working and retire you can access money in your stakeholder pension.
In fact, you don’t have to retire to take money out of your pension as you can do this from the age of 55.
There’s a lot to weigh up when working out which option or combination will provide you and any dependants with a reliable and tax-efficient income throughout your retirement.
Setting up a stakeholder pension
If a stakeholder pension is offered through your employer, it will have chosen the pension provider and might also arrange for contributions to be paid from your wages or salary.
The employer might contribute to the scheme. The pension provider claims tax relief at the basic rate and adds it to your fund.
If you are a higher or additional-rate taxpayer, you’ll need to claim the additional rebate through your tax return.
You can also set up a stakeholder pension for yourself.
Their flexibility, low minimum contributions and capped charges can be of benefit if you’re self-employed or on a low income.
Changing jobs
If you change jobs, you should check to see if your new employer offers a pension scheme.
You can continue paying into an existing stakeholder pension, but you might find you’ll be better off joining your new employer’s scheme, especially if the employer contributes.
Compare the benefits available through your employer’s scheme with your stakeholder pension.
If you decide to stop paying into a stakeholder pension, you can leave the pension fund to carry on growing, mainly through investment growth, but check to see if there are extra charges for doing this.