1. What is a stakeholder pension?
A Stakeholder pension is a low cost pension scheme that allows you to save in a tax-efficient way for your retirement.
2. Who is such a pension scheme for?
Anyone who wants to provide an income for themselves when they reach retirement age can take out a stakeholder pension. The State pension is very small and will only provide a basic income in retirement. It is expected in time that the State pension will gradually be eroded. It is therefore advisable to supplement any State pension by making provision for yourself. With a stakeholder pension, you simply contribute during your working life. Then when you come to retire, the funds that have built up provide you with an added income in retirement.
3. Do I have to join a scheme?
If your employer employs 5 or more people (including part-time staff), they will probably have to provide you with access to a stakeholder pension scheme. Your employer does not currently have to contribute to a scheme but only chose a pension company that all staff can contribute to, if they wish. You do not have to join the scheme. But joining and contributing to such a scheme is a key way to ensure that you have enough money to live on comfortably in retirement.
4. What are the tax advantages of a stakeholder pension?
(i) Contributions to a scheme attract basic rate tax relief at source (currently at 20%). For example, if you pay £80 each month, the Government will pay £20 each month on your behalf into the scheme, making the total contribution £100.
(ii) If you pay higher rate tax, you can claim additional tax relief on your Tax
Return (currently 20% i.e. the difference between 40% and 20%).
(iii) Your investments will grow free of UK capital gains tax.
(iv) When you retire or decide to draw the pension, you can take up to 25% on the fund value at that time tax-free.
5. How much can I pay into my stakeholder pension?
You can decide how much to pay into your plan. The more you contribute, the larger your pension will be when you retire. However, the following minimum and maximum amounts apply:
a) Minimum: £20 per payment. This applies to regular contributions or one-off payments.
b) Maximum: You can contribute up to £3,600 gross each year regardless of whether you earn or how much you earn. If you pay more than £3,600 in a year, the maximum you can pay is 100% times your “net relevant earnings”. Net relevant earnings are for employees your gross salary, plus bonuses, plus benefits in kind
and for the self-employed is the net taxable profit for that tax year. There is a maximum pension contribution you can make in any one year (currently £245,000) but this cap will not affect many people.
6. How often can I contribute?
You can pay into your pension scheme whenever you wish. For example, you can choose to pay on a regular basis or every now and then with a single payment. Typically, most schemes will set up a direct debit directly with you so that you pay monthly contributions to the pension provider.
7. Can I change my contributions?
You can increase or decrease your contributions at any time without any penalty. If you decrease, the payment cannot go below the £20 minimum set out in 5a). above. You may need to advise your employer in writing of changes.
8. Can I stop and start my contributions?
Yes. You can stop and start contributions without penalty, say if your financial circumstances change. You can also transfer the funds held with one pension company to another, again without penalty. You would need to check whether your employer would facilitate you making payments to a different pension company to that chosen by your employer.
9. What happens if I change jobs?
The pension plan is personal to you and, therefore, can move with you if you change employment. If your new employer has a stakeholder pension scheme with a different pension company, you can choose whether to begin paying into that new scheme or continue with your existing one.
10. What will I receive when I retire or begin to draw my pension?
You can start to take your benefits, whether or not you have actually retired, at any time between your 55th
and 75th birthday. There are two ways in which you receive your benefits:
a) The whole of the fund value could go to provide you with a regular income for the rest of your life;
b) Alternatively, you can take up to 25% of the fund as a tax-free lump sum, using the balance to provide you with a reduced income for your life. Whichever you choose, you can use some of the fund to give your dependants a pension after your death. You can also choose to have a pension that remains level or one that
increases automatically each year. The amount of the pension you receive depends on the size of the fund, your age, sex, the interest rates prevailing at the time you take your benefits and the type of pension you choose. We strongly recommend that you take independent financial advice at the time you decide to take your benefits.
11. What about charges and hidden costs?
Pension companies will charge a management charge to cover their costs and allow for profit. However, the annual charge is limited in law to 1% of the fund value.
