Stakeholder Pensions

Stakeholder pensions work in much the same way as other money purchase pensions. You pay money into your pension to build your pension fund. The managers of the stakeholder pension scheme invest the pension fund on your behalf. The value of your pension fund will be based on how much you have contributed and how well the fund's investments have performed. It is best to make regular payments if you can, but you can stop payments for a while if you need to without it costing you anything. When you retire, you use the fund you have built up to buy an annuity (a regular income payable for life) from a life insurance company of your choice. Most people choose to wait until they are 60 or 65 until drawing on their stakeholder pension. However, if you wish you can draw on these benefits while still working. Limit on annual management charges: Managers can charge fees of up to one and a half per cent of your pension fund each year for the first 10 years you hold the product, and thereafter up to one per cent

Flexibility:

You can switch to a different pension provider without the provider you leave charging you You can start contributions from as little as £20, and pay weekly, monthly or at less regular intervals You can stop, re-start or change your payments whenever you want – there are no penalty fees

Security:

The scheme must be run by trustees or by an authorised stakeholder manager, whose responsibility will be to make sure that the scheme meets the various legal requirements

Contribution levels and tax relief

You can now save as much as you like into any number and type of pensions, including stakeholder pensions. You get tax relief on contributions of up to 100 per cent of your earnings each year, subject to an 'annual allowance' (£245,000 for the 2009-2010 tax year and £255,000 for the 2010-2011 tax year). In practice, this means that for every £80 you pay into your pension, you end up with £100 in your pension pot. If you're a higher rate taxpayer you can claim the extra tax back.  Savings above the annual allowance will be subject to a tax charge. If you don't pay tax, you can still get tax relief on your (or someone else's) contributions up to a certain limit.

Is a stakeholder pension right for you?

A stakeholder pension could be a good choice if:
  • You are self-employed
  • You aren't working but can afford to pay for a pension
  • Your employer doesn't offer a company pension scheme
  • You do not pay into a company pension
  • You are on a moderate income and wish to top up the money you would get from a company pension
If you're an employee you can opt out of the additional State Pension and instead put the National Insurance payments which would have gone towards it into a personal pension, including a stakeholder pension.
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