We’ve already shown you why a stakeholder pension can be an easy, cheap and flexible way to save for your retirement, but how do you actually go about getting the best one for you? We show you what to look out for and how to compare products in this step-by-step guide.

• What is a Stakeholder pension?
• How do you choose the right one?
• Compare charges
• Decide what type of investor you are
• Consider using a discount broker
• Get some advice

What is a Stakeholder pension?

Stakeholder pensions are simple, cheap and flexible. They work…and that’s why we like them.

The rules for stakeholder pensions is that you can’t be charged more than 1.5% a year for the first 10 years and 1% a year thereafter. The minimum contribution is just £20 and there are no penalties if you want to alter your monthly contributions or transfer to another scheme. You can put in lump sumps or you can set up a regular standing order to pay into one or you can do a mixture of the two.

They have the same rules as any other pensions when it comes to how much you can put in, what tax-relief you get on them and when you can start to draw them. The big difference is that anyone can put money into a stakeholder pension, whatever age they are and whatever their employment situation. So if you’re unemployed, a homemaker or even a baby, you can have one.

The other big advantage of having a stakeholder pension over other, ordinary private pension is that the charges are low and, therefore, you have a much better chance of your pension fund doing well over the long-term.

We have lots of advice on whether to choose a stakeholder pension or not in this guide to Stakeholder Pensions but if you’ve already decided a stakeholder pension is the way to go, the next step is to decide how you’re going to get one that is right for you…

How do you choose the right one?

Step one: Shop around

Various financial services companies such as insurance companies, banks, investment companies and building societies offer stakeholder pensions. A list of registered stakeholder pension scheme providers is available from the Pensions Regulator’s website.

As with any financial product, it pays to shop around and the crucial thing to look out for here is the annual management charge (also known as the AMC).

Remember that stakeholder pensions are relatively new products (they were brought in just ten years ago) so they haven’t had that much time to grow. That makes it a bit harder to judge them on past performance. However, it’s worth looking at how they have done at least in that short time. Also, you should consider:

• the fund’s charges (as mentioned above)
• the company running the fund – if you’re not sure, it’s generally best to go for long-established names as they are the least likely to fail
• what the fund invests in – e.g. does it invest mostly in the UK or abroad, is it a mix of investments etc. You might prefer to have something that invests mostly in the UK or you may want to keep your money right out of this country. Ultimately it’s up to you where you are happiest putting your money.

Step two: Compare charges

You can compare stakeholder pension charges on the Moneymadeclear website by filling in a few basic details. For example, a 30 year-old planning to retire at 65, investing a single lump payment of £10,000 would pay £44,212 in charges and deductions with Forester Life’s Personal Pension Plan but only £28,000 with L&G’s Stakeholder Pension Scheme.

Step three: Check for extra discounts

Although this should never be the main reason for choosing a product, keep an eye out for special offers which may help to boost your pension even further.

For example, Scottish Widows is currently offering 20% off their annual stakeholder fund charges when you apply online and can make regular contributions by direct debit.

Step four: Compare funds

Once you have an idea about the types of charges you can expect, approach a few of the firms you like the look of and ask to see their Key Features Document which provides all the important details about their particular stakeholder pension. Don’t expect this document to be a bundle of laughs but do at least scan through it as it does have important information about your potential pension and will help you decide if it is right for you.

How well your pension performs will depend on the funds you pick and how they perform. In other words, if you pick a good fund you will make lots of money while if you pick a bad fund, it won’t. There – obvious, but it needed to be said!

However, this puts all the burden of choice onto you and you might feel that you don’t know how to pick a good fund. Most people feel like that (including many financial advisers) and even the experts get it wrong, so don’t kick yourself if you don’t pick the absolute best. Just don’t put your eggs in one basket. Make sure you have investments in various different places and different products to keep your money safe.

If all this potential choice is too worrying for you and you don’t want to pick a specific fund there is a default investment option which all stakeholder pension providers have to offer. So if you really can’t bear to decide which fund to go for, pick this option where they make the decision for you.

If, however, you decide you want to decide how and where your money is invested, we suggest you choose a pension with a wide range of funds. Two big companies to look out for here are Aviva and Standard Life, which typically have low charges and have a fairly wide range of investment funds to choose from depending on your attitude to risk.

There are various types of fund to look out for including:

• Equity funds – these funds invest in the shares (equities) of various companies which are sold on the stock market. Long term, equity funds have proved to produce impressive returns, but short term they could fall a lot. Only invest in this type of fund if you’re looking to put your money in for at least the next ten years. Common types of equity fund include tracker funds (which mirror the performance of a whole market e.g. the FTSE 100) which we like, specialist funds e.g. income funds, large company funds which focus on a specific area of the stock market, and overseas funds.

• Cash funds – simple low-risk deposit accounts with interest earned but minimal gains often used when you’re approaching retirement so that your money is moved out of riskier (but more profitable) investments until you retire. These are better for people who only want to invest for a few years – maybe if you’re in your late fifties and you’d like to top up your pension pot.

Other funds include bond funds, property funds, managed funds, lifestyle funds, With Profit funds and ethical funds but you can get all the details of those here on the Pensions Advisory Service website which also has this helpful investment planner to help you decide how to invest your contributions.

Step five: Consider using a discount broker to invest in these funds

Once you’ve decided which pension is for you, it may be cheaper to use a specialist pension broker – who arranges your pension without advice – as they give back some or all of their commission from the providers back into your fund.

There aren’t many companies to choose from but two of the biggest are Cavendish Online (which charges a one-off fee of £25 online and gives back all of the commission) and Hargreaves Lansdown (which doesn’t charge a fee and gives back a proportion of the commission).

Step six: Calculate your savings

Whether or not it is better to buy direct or via a discount broker will depend on how much you are able to save and which provider you decide to go with.

If, for example, you buy directly from a provider such as Aviva which charges just 0.9% if you apply online, you would be charged an annual fee of £90 on a £10,000 pot.

If you use a broker such as Cavendish Online and pay the one-off £35 fee you can reduce Aviva’s annual management charge to just 0.55% – see here for full details – which means you would only pay £55 a year on your pot (plus the one-off £35 at the start).

However, if you had chosen L&G (which charges 1% a year on the first £25,000 when you apply online) a £10,000 pot would be charged at £100 a year whilst Cavendish Online actually charges an annual fee of 1.1% for the first £15,000 – see here for full details – and this would cost you £110 a year.

Step seven: Get some advice

If your situation is more complex, or you are confused about your options the best thing to do is get some help from an independent financial adviser (IFA) who specialises in pensions. Use this Unbiased tool where you simply enter your postcode to find a list of IFAs near you.

Useful contacts

• Unbiased
• Hargreaves Lansdown
• Cavendish Online
• Aviva
• Standard Life
• Scottish Widows
• L&G’s Stakeholder