Stakeholder pension schemes
Stakeholder pension schemes are a type of defined contribution pension scheme. They are a flexible way to build up retirement income benefits, while benefiting from tax advantages, whether you’re employed, self-employed or not working. They are designed to be accessible to all, and have limits on the charges that can be imposed.
How stakeholder pensions work
The Government has laid down a set of conditions for stakeholder pensions to make them more accessible and to limit the amount of charges that you have to pay. They work in a similar manner to a personal pension plan.
Stakeholder pensions (SHPs) are individual contracts between you, the member, and the pension provider. The pension provider is often an insurance company or an investment platform, although there are also a number of other providers, including banks and building societies.
You can hold a stakeholder pension if you’re employed, self-employed or not working. If you’re employed, your employer can contribute to your stakeholder pension. Other people are also able to contribute, and you can also contribute to other people’s stakeholder pensions. For example, you could contribute to your spouse’s or partner’s SHP or even to a child’s SHP to allow them to start building up retirement benefits from an early age.
Since 2006, there has been no restriction on the number of different pension schemes that you can belong to, although there are limits on the total amounts that can be contributed across all schemes each year if you are to receive tax relief on contributions. This means you can have a stakeholder pension to provide additional retirement benefits, even if you're a member of a workplace pension scheme.
Stakeholder pensions are flexible and portable. 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. If you do change jobs, you should let the pension provider know to ensure that your contributions continue (especially if your old employer was paying contributions on your behalf).
Drawing pension benefits
Stakeholder pensions are money purchase schemes. 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; and
- the level of charges.
Under current legislation, you can commence drawing retirement benefits from the age of 55 and you don't have to stop work to draw benefits.
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.
The amount of income you receive depends on the options that you have selected. These include the income continuing to be paid to a dependant in the event of your death, the income increasing each year to offset the effects of inflation and the frequency at which the income is paid.
Pensions that are paid are liable to income tax, but are not liable to National Insurance contributions.
If you've previously contributed to a pension scheme, you may have retained benefits under the scheme. You may want to consider transferring the value of any old pensions to a new pension scheme. Please talk to us if you are interested in this.
All contributions that are made to your stakeholder pension are invested, typically in a range of funds that you can choose. There are thousands of different funds to choose from, although not all providers off access to all funds. You can switch between funds, should you wish to.
Different funds have different risk profiles. While higher risk funds can potentially provide higher returns over the longer term, these returns may be volatile, and the value of your personal pension could go down.
Deciding which funds to invest in can be a complicated and time-consuming process, and you may wish to seek advice. Our pensions specialists are happy to answer your pension-related queries.
If you don’t want to choose which funds to invest in, there is also a ‘default’ fund that your contributions can be automatically invested in. This default fund is chosen by the pension provider, but it has to meet conditions laid down by the Government.
If you invest in the default fund then, as you approach retirement, the investments held will automatically be moved to less risky assets to shield you from investment volatility (the ups and downs of stockmarkets). This is called lifestyling and will start at least five years before your expected retirement date, unless you tell your pension provider that you do not want lifestyling to apply. If you have chosen the investment funds yourself, you can request that lifestyling is applied to these funds.
Group stakeholder pensions
A group stakeholder pension is a collection of stakeholder pension schemes, and they work in a similar way to personal pensions. If you joined your employer’s group stakeholder pension scheme before 1 October 2012 and are still making contributions, your employer must continue taking contributions from your pay or salary and paying these contributions across to the scheme, until you decide to stop paying regular contributions, or you leave your job.
An employer does not have to offer workers access to a stakeholder pension if they join, or restart a job, after 1st October 2012.
Conditions for stakeholder pensions
The conditions that a stakeholder pension scheme must meet include:
- Membership must be available to all employees with a particular employer. It cannot be restricted to certain classes or employees;
- Annual management charges must not be more than 1.5% per year for the first ten years of scheme membership and then not more than 1% thereafter;
- The minimum gross contribution payable to the scheme must not be set at a level higher than £20, whether the contribution is paid on a regular, or, a one-off basis;
- Contributions must be accepted if they are made from a bank account or building society account by way of cheque, direct debit, standing order or direct credit. The provider may also decide to accept other payment methods;
- Contributions may be stopped or restarted at any time, without penalty;
- Members must be provided with a default fund for investment if they do not want to make investment choices themselves;
- Other investment choices offered must meet diversification and suitability criteria;
- A ‘lifestyling’ investment option must be available. Lifestyling involves the gradual transfer from higher risk investments to lower risk investments as a member approaches their selected retirement date. Lifestyling must commence at least 5 years before the member’s selected retirement date. It’s designed to shield the member’s accumulated fund from investment volatility in the period leading up to the member’s selected retirement date;
- Transfers in from other UK schemes must be accepted without additional charges (including contracted-out benefits);
- Normally when a transfer out is made to another scheme, there will not be a penalty. Penalties may apply if an individual is invested in a with-profits fund;
- Members must be provided with a detailed statement each year.
Can I change the amount I pay into my SHP?
Before changing contributions, you should check with your pension provider, although normally this should not be a problem. If you're employed, and your employer is matching your contributions, a change to the level of your contributions could result in a change in the contributions your employer pays, so you should also let them know. If you’re increasing your contributions, your employer may also increase their contribution.
Can I pay a lump sum into my SHP or GSHP?
Yes. The minimum additional payment into a stakeholder pension scheme is £20.
Contact your pension provider as you may need to complete a form. Contributions that you pay as the member, receive basic-rate income tax relief at source, subject to certain conditions. For example, if you pay a lump sum of £400 into your SHP or GSHP, this will receive tax relief of £100, so a total of £500 is invested in the GPP. If you’re a higher-rate (40%) taxpayer you can also claim additional tax relief of up to £100 through your self-assessment tax return and up to an additional £112.50 if you are an additional-rate (45%) taxpayer.
Can I stop paying into my SHP or GSHP?
Yes. Contributions to stakeholder pensions can be stopped or restarted at any time without penalty. You should be aware that stopping contributions is likely to reduce the retirement benefits that you may receive in the future.
Can I set up a stakeholder pension for my child and make payments into it?
Again, payments that you make to your child’s SHP will receive basic-rate income tax relief at source. Any higher- or additional-rate tax relief can only be claimed by the member (e.g. your child, in this example). You can also contribute into anyone else’s personal pension, for example, a spouse’s or partner’s personal pension.
Where can I find out more?
If you need more information, please contact us. A pension specialist from our team will be happy to help with whatever pensions-related question you have. Our help is always free.