Stakeholder Pensions
What are they?
Stakeholder pensions are straightforward, low cost and flexible money purchase type pension plans. Their introduction by the Government on 6 April 2001 was intended to encourage more of us to save towards retirement and give the bloated, complacent pensions industry a big kick up the backside. They've largely succeeded in the latter, if not the former.
Prior to stakeholder, personal pensions were generally expensive and inflexible, favouring providers and salesmen over consumers. Stakeholder turned that situation on its head, driving down pension charges and improving flexibility mostly across the board.
Who can own one?
Almost anyone, including children, provided they're under 75 and normally resident in the UK. You can contribute even if you already contribute into another pension, subject to the rules on overall pension contributions.
How much can I contribute?
The minimum amount is £20 gross (i.e. before tax relief), while the maximum is subject to normal pension rules.
| Stakeholder Contribution Limits - gross (i.e. before tax relief) |
| Minimum |
Maximum |
| £20 |
£3,600 - 100% of UK earnings subject to annual allowance limit (to get tax relief) |
The maximum annual amount, while still enjoying tax relief, is 100% of your UK earnings (but no greater than the annual allowance, see the
Candid Money guide to pension rules), or £3,600 if that is greater. This means that non-earners, including children, can enjoy basic rate tax relief on contributions up
to £3,600 a year, i.e. they only need to pay £2,880 to enjoy a full £3,600 contribution.
You're also allowed to contribute into someone else's stakeholder pension, e.g. your spouse or grandparents contributing for their grandchild. They'll get the tax relief at basic rate, it won't affect your own tax bill.
How flexible is stakeholder?
Very. You can contribute lump sums or make regular payments, stopping and starting as you wish without penalty. You can also transfer your pension fund to another provider without penalty.
How much will it cost?
Stakeholder pensions have just one cost, an annual management charge of up to 1.5% for the first 10 years falling to no more than 1% per year thereafter.
Before 6 April 2005 the cap was 1% throughout the pension's life, this still applies to policies taken out then. However, if you transfer to another provider the new charging cap will instead kick in.
Investment choice
Like any money purchase pension, you can invest your contributions in one or more investment funds. The choice of investment funds offered varies widely between stakeholder providers, with some offering over 30 and others as few as two.
Your choice of investment fund(s) is key, as it could have a big affect on how much retirement income you eventually receive, so this should be your main criteria when choosing a provider:
- Ensure there's sufficient choice allowing you to invest in global stock markets and other areas such as bonds (often called 'fixed interest'), property and cash.
- Check past performance of these funds. While it's no guarantee to the future, it should give you a reasonable indication of whether the fund managers are actually any good.
Some stakeholder providers also provide access to funds run by fund managers other than themselves, this is generally a good thing as it increases the likelihood of finding funds that are worth investing in.
| Popular Stakeholder Pensions - Fund Choice & Charges |
| Provider |
Annual Charge |
Own Funds |
External funds |
Notes |
| Santander |
1.5% |
3 |
0 |
|
| Aviva |
up to 1% |
19 |
21 |
|
| CIS |
1.5% |
6 |
0 |
|
| Friends Provident |
0.8% |
11 |
0 |
|
| Legal & General |
up to 1% |
24 |
17 |
Additional 0.15% charge for external funds |
| Scottish Widows |
1% |
23 |
12 |
External funds are all index-trackers |
| Standard Life |
up to 1% |
33 |
0 |
|
| Virgin Money |
1% |
2 |
0 |
|
| Last updated 10 April 2013 Details shown for pensions purchased directly from the provider, these may vary if bought via an adviser or a group scheme. |
For most people, the only reason for looking outside of stakeholder, e.g. a self-invested personal pension, is that they want a greater investment choice.
Read the Candid Money guide to pension investment choice to find out more.
What happens when I retire?
You can take up to 25% of your pension fund as a tax-free lump-sum. The balance is used to purchase an income for life using an annuity. You're allowed to shop around for the best annuity deal (called an 'open market option'), so make sure you do.
It could make a difference of thousands of pounds over the rest of your life. You could also have the option to instead draw an income, leaving your pension fund invested. To find out more read the Candid Money guide to annuities.
What happens if I die?
This depends on your age and whether you've already taken pension benefits. For full details see the Candid Money guide to pension rules.
Ways to buy a stakeholder pension
Pension ProviderEmployerFinancial AdviserDiscount Broker
Most insurers sell their stakeholder pensions drect, often via the Internet, as well as through financial advisers. If you can find a financial adviser who'll give you
advice without charging a fee or a discount broker who'll rebate commission (both could prove difficult) then that might be better value, else buying direct is usually no
bad thing in this instance.
Your employer may offer you a stakeholder pension. If they offer to contribute some money on your behalf it could prove a good deal. However, if they don't then check
whether the pension is better than others on the market, e.g. has the employer negotiated a discount? How many investment funds can you choose from? etc.
You're free to shop around and use whichever provider you wish, or not bother contributing a pension at all, so don't feel obliged to use the offered scheme.
Advisers generally shy away from stakeholder pensions unless you're prepared to pay them a fee for advice. In fairness, the typical commission on a £3,600 stakeholder
pension contribution is around £36, not enough to make it worth their while unless they believe they'll get other, more profitable, business from you. Unless you're
contributing £10,000 or more, a fee is unlikely to be cost effective.
Because commissions (only paid when advice isn't given) on stakeholder pensions are so low, discount brokers generally struggle to offer much of a deal, if any. Looking at the maths it's not
surprising. If a £3,600 contrubtion pays 1%, i.e. £36, commission, it's probably more hassle than it's worth for a discount broker to split this with you.
The few discount brokers who rebate all commission in lieu of a fixed fee also struggle here, as unless you're contributing rather more than £3,600 you probably
won't end up being better off than going direct to an insurer.
Stakeholder Pension Jargon
Here's some of the more common stakeholder pension jargon you might come across:
| Stakeholder Pension | A money purchase type of pension that has high flexibility and low charges. |