Stakeholder pensions explained
Almost everyone should have a personal pension plan. But there are several types of personal plan to consider.
Some, like SIPP plans, give you a great deal of choice. The responsibility of choosing and managing the assets your contributions are invested in is yours. But if you are not an investment expert, you might want something simpler. One of the simplest arrangements is the stakeholder pension.
But although simplest can often be appropriate, a stakeholder pension might not be the most suitable choice for your retirement.
What is a stakeholder pension?
Stakeholder pensions were launched in 2001, to shake-up Britainโs pensions landscape, making it easier and cheaper for people with low or moderate earnings to put money away for retirement.
Like most pension plans these days, stakeholder pensions are defined contribution schemes. This means that the eventual size of your pot will be based on the amount paid in and the investment performance your fund enjoys.
Like other types of personal pension, contributions are boosted byย tax reliefย equivalent to the rate of income tax you pay and when you access it, you will be able to take 25% as a tax-free lump sum.
Stakeholder pensions must meet minimum standards set by the Government. This means that someone who takes out a stakeholder pension may not have a full understanding of what to expect from their pension, especially if they haven't received financial advice.
However, while stakeholder pensions have advantages such as capped charges, default investment options and flexible contributions, the investment choice is limited, compared to other personal pensions.
A stakeholder pension may be the simple choice, because you can let the provider take care of the decisions about how your money is managed, but it might not be the most rewarding.ย
The pension world has moved on
Back in 2001 when they were launched, almost all private pensions were from insurance companies offering stakeholder pensions.
There were government safeguards that made them look appealing. They had to accept minimum contributions of ยฃ20 a month or less to be viable for those with low incomes. Those contributions had to be flexible โ and charges were capped. Most important of all, they had to offer a default investment option โ for savers that do not want to choose their investments.
But despite all these advantages, Stakeholder pensions have fallen from favour. Currently, itโs only possible to take out a new stakeholder pension from a very limited number of life insurance companies, with most stakeholder pensions now closed to new business.
Why is this? The cost of personal pensions in general has dropped dramatically. The low charges that made stakeholder pensions look good value are now found with many if not all pension products. Whatโs even more important is that people may be more confident about planning their financial futures, wanting active involvement rather than leaving it to their provider.
The private pension market is now dominated by DIY investment platforms, with greater investment choice, better functionality, including app access, trading and no adviser fees.
It may also be because most people planning their pension seek independent advice.
Is a stakeholder pension suitable for you?
For those who donโt have access to a workplace pension such as the self-employed and those that want a separate personal pension, it makes sense to consider the full range of options, including stakeholder pensions.
A basic stakeholder pension can provide a simple entry to the world of retirement saving. However, those that are happy to make a few more decisions could get better long-term value from a more modern personal pension.
Independent expert advice is essential to understand the impact of your choice of pension plan.
If you are looking at the most suitable way to help make your pension savings work for you, or have an existing stakeholder pension plan that you would like to work harder, simply call us at Continuum.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable retirement strategy you should seek independent financial advice before embarking on any course of action.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Pension income could also be affected by interest rates at the time benefits are taken.
Pension savings are at risk of being eroded by inflation.
The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.
Stakeholder pensions: what are they and should you get one? (telegraph.co.uk)