From 6 April 2012 (the end of the financial year), stakeholder pensions cannot be used to contract out of the additional State Pension.  Therefore, we think it’s well worth considering investing money in a stakeholder pension now in order to enjoy the tax relief benefits available. Stakeholder pensions are cheap, easy and upfront about what they invest in. Also, anyone can have one, from a baby to a mum taking time off and you can just put in what you can afford each month while the Government adds in extra cash. Here’s how they work.

• What is a stakeholder pension?
• Will I get taxed?
• Are stakeholder pensions risk free?
• Should I have one?
• Which stakeholder pension should I get?
• Children and stakeholder pensions

What is a stakeholder pension?

The first thing to understand is that a stakeholder pension is a private pension, not a state pension. Anyone can have one, although they were originally brought in to help mothers and people who weren’t able to work for whatever reason. Before stakeholders, you could only contribute to a pension if you were working. Stakeholder pensions, however, can be contributed to by anyone. If you’re not working, someone else can put money in for you.

It’s up to you how much money you put into it although if you’re not working you can only put in up to £2,880 a year. Happily, because it’s a pension, the Government then puts in the tax you (or someone else) would have paid on that money (20%) so they make it up to £3,600 a year.

You’ve probably heard people grumbling about how rubbish the State Pension is (it only pays just over £5,000 a year for a single person). Well a stakeholder pension allows you to build up some extra money alongside any other pension provisions you might already have. So if you’re worried that your current pension plans won’t provide you with enough money later on in life, this could be part of your retirement pot (remember you don’t have to have a pension at all, but it’s a good idea to have some of your ‘retirement pot’ in pension products, if only for the tax break).

Unlike with a State Pension which you can only start to claim once you have reached retirement age, a stakeholder pension allows you access to your funds much earlier on. The minimum age you can claim money from your stakeholder pension is 55, which is ten years earlier than when a man used to be able to claim his State Pension and five years earlier than women could.

Stakeholder pensions are available from most banks, building societies, insurance companies, investment companies and financial advisers, and any UK resident under the age of 75 can have one (including babies as you can see in our article on stakeholder pensions for babies). Each plan has to meet the minimum standards laid down by the Government, which is good as it means you won’t get ripped off.  These standards include:

• Limited charges – With a stakeholder pension you will only face one charge, which is known as the Annual Management Charge (AMC). This is basically the cost of having someone manage your account, and by law you cannot be charged more than 1.5% of the total amount of your pension fund. After ten years this drops to just 1%.
• Low minimum contributions – You can put in as little as £20 a go.
• Flexible contributions – You can put money in as and when you want.
• Penalty-free transfers – You can switch to a different stakeholder pension provider without being charged a penny.

Will I get taxed?

A great benefit of stakeholder pensions, as with any pension product, is that you get tax relief on the amount you pay into them. This means that if you’re a basic rate taxpayer then for all the money you put into your plan, the provider will claim a basic rate of 20% back from the Government. Or in simple terms, for every £80 you pay in an extra £20 will be added.

If you’re paying a higher tax rate of 40% then you can still claim this amount back. The first 20% will be claimed back by your pension provider as though you were a basic rate taxpayer. You can claim the extra 20% when filling out your annual tax return, or by writing to or calling your Tax Office.

Currently you can put as much into your pension each year as you like up to the total of your annual salary, but there is cap on how much this can be. This cap is known as your “annual allowance” and for the 2011-12 tax year it equals £50,000. Altogether you can put up to £1.5 million into your pension over your lifetime and get tax relief on it. Anything over that you won’t get the tax back.

If you want to put in more than your annual salary into your pension pot each year you won’t get any extra tax relief so think about putting that money into other products like stocks and shares ISAs, for example.

To find out more about the tax advantages of having a personal pension, look here.

Are stakeholder pensions risk free?

No serious investments are risk-free and you shouldn’t think of a stakeholder pension as being risk free. As your money is generally invested into stocks and shares, property, bonds etc, the value of your nest egg could go up or down in the short term. However, in the long term, it should (note...should) go up overall (even though some years it could go down and others it will go up).

There are various investments you can put your money into, some with greater risks (and often greater returns) than others, so you’ll need to decide how safe you want to play it and go for a plan that reflects this. On the whole, stakeholder pensions invest largely in index-tracking products which track the stock market day after day. The stock market goes up and down every day but over the last 100 years it has gone generally upwards. Assuming it continues in this way you can be sure that in the long term your money will go up.

Should I have one?

Hmmm, the million dollar question and one which ultimately depends on how confident you are that your current pension provisions (e.g. your State Pension) will be enough to get by on in later years. Anyone can have a stakeholder pension (even if you’re not working) so it’s really up to you whether or not you think it’s necessary.

If you’re self-employed there are many benefits to having a stakeholder pension – they’re tax efficient (as with any pension) and they are cheap and easy to set up. Once you have one you don’t have to do much more than keep an eye on how it is doing once a year. This also applies if you’re not working but you have someone who could pay towards a pension for you.

Even if you’re employed it’s not all plain sailing. Some companies don’t offer a work-related pension scheme, or perhaps they do but you’re not that keen on it. If this is the case then a stakeholder pension could again be the way to go, mainly because it’s easy to set up and doesn’t cost much to run (unlike most other private pensions).

It’s also worth noting that if you’re employed your employer MUST provide you with access to a stakeholder pension scheme. The only exceptions are if they have fewer than five employees or are already offering an occupational scheme. Whilst this is useful for employees it’s nowhere near as good as a traditional company pension because the employer is not likely to contribute to the pot.

Which stakeholder pension should I get?

Choosing a stakeholder pension is a bit like choosing a pair of shoes, or a lipstick. It’s very personal, and a plan which suits your friends and family might not suit you. Just make sure that you get it clear in your mind how much you’ll be charged each year (an AMC fee) and the fund options available should you at anytime want to increase or decrease the risk of your investment.

There are a few offers around right now in the stakeholder arena. Scottish Widows lets you start from as little as £20 a month, whilst Aviva boasts an impressive number of funds ranging from low to high risk. Virgin also offers a solid-looking deal.

There are loads more to choose from so a good first port of call would be the Money Advice Service pension comparison. You just answer a few simple questions and the pension calculator produces a table with the various pensions on offer.

Children and stakeholder pensions

As anyone can have a stakeholder pension, whether they are earning or not, this means that even babies can have one! In fact, since they were introduced in 2000, a number of families have set up stakeholder pensions for a new baby with members of the family contributing each year (up to £2,880).

Stakeholder pensions are a really good way of setting up your child for later on in their lives. In fact, if you paid the maximum amount into their stakeholder for the first 15 years of your child’s life you would probably sort out their pension needs for them because of the many years that money will have to grow. You probably won’t get much thanks for your effort as they can’t access the money until they’re 55, but the older they get the more they will realise the value of your contribution.

Most stakeholder pension plans accommodate children, and the maximum amount that can be paid into a child’s plan is £3,600 per year (actually £2,880 with the Government putting in the rest). We have more information on our stakeholder pensions for babies article.

Don’t miss our essential guide to investing for children.

For more information on stakeholder pensions visit Directgov’s stakeholder pension page.

Useful links

• Directgov
• Scottish Widows
• Virgin
• Aviva

If you’re still not sure about stakeholder pensions, you can leave a comment below or even ask Jasmine herself!