Stakeholder Pension

The stakeholder pension was introduced on 6 April 2001. Almost everybody between the ages of 0 and 75 may take out a stakeholder pension. A scheme may be started with as little as £20 a month and it is not necessary to make regular contributions. People who cannot take out a stakeholder pension are those in an occupational pension scheme who are controlling directors or who are earning more then £30,000.

Stakeholder providers are only allowed to charge a maximum of 1% a year. Features include the ability to increase, decrease, stop and re-start a stakeholder pension without penalty. In addition a stakeholder may be transferred to another provider without penalty.

The Stakeholder pension also enables those without earnings, such as wives, carers, pensioners and students, to pay into a pension scheme. The rules also allow someone else to pay into a stakeholder plan for another person, for example, husbands for their wives and grandparents for their grandchildren. A parent or guardian or grandparent can set up a stakeholder and pay the contributions for any number of children under 18. At age 18 the child can start making their own contributions. If buying a stakeholder for someone else's child, you must tell the parents to ensure than the child only has one stakeholder pension in any one year. The rate of tax relief is set at the basic rate of 22% for those taking out stakeholder pensions on behalf of others. Contributions made by the self employed are also made net of basic rate tax.

The annual limit that can be saved in a stakeholder pension is £3,600 gross a year, which includes basic rate tax relief. A basic rate taxpayer would only actually pay in £2,808 and the government would make up the rest. A higher rate tax payer wishing to make a gross contribution of £3,600, will pay a net contribution of £2,808 up front and then apply for the 18% high rate tax relief of £648, either directly from their tax office or on their self assessment tax return. As well as tax relief on contributions, there is no income tax or capital gains tax on growth (apart from tax on dividends from UK companies).

The stakeholder has been designed to work on its own and alongside other pension schemes. It may be used in addition to a company or private pension, as long as you don't exceed the overall contribution limits. You can buy the stakeholder through a bank, building society, insurance company, investment company and financial adviser.

By law, companies with a staff of five and more and no other occupational pension scheme are required to have an arrangement with a stakeholder provider to offer staff access to a stakeholder pension. However, companies are not required to contribute to the employee's stakeholder pension. If you buy your stakeholder through your employer and later on change your job, the plan is portable and may be taken with you.

Up to 25% can be taken as a tax-free cash sum and the rest is used to provide you with an income during your retirement. This can be done by buying an annuity from a life assurance company or drawing income out of your fund through a process known as income drawn-down.

There are now a number of newer and more flexible annuity and income draw-down schemes and you must seek financial advice before making any decision about your retirement income.

Stakeholder pension plan providers will normally invest in about five to 10 different types of funds including tracker and actively management funds. Some providers allow you to choose the type of investment you want and may allow you to switch to another fund free of charge.

Last Updated: April 2008 © Moneyextra.com

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