Stakeholder pension schemes
Stakeholder pension schemes are a type of defined contributions 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.
There are different ways that this income in retirement can be provided. These include taking out an annuity and income drawdown.
Pensions that are paid are liable to income tax, but are not liable to National Insurance contributions.