alAs Due to often Stakeholder pensions offer a cheap, flexible, and easy way to build your retirement fund.
But how do they work, and how do you choose the right one for you?
This quick and easy guide outlines how to get a stakeholder pension that suits your retirement plans.
- 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
Unlike expensive personal pension plans, stakeholder pensions offer a much cheaper way to save for your retirement. Due to the Welfare Reform and Pensions Act 1999, the Government identified a need for cheap, simple pension investments for those on low incomes. Stakeholder pensions were introduced as a result.
They have to stick to some strict rules:
- Fees must not exceed 1.5% in the first 10 years
- Fees must not exceed 1% a year from year 11 onwards
- The minimum contribution is £20
- No penalties for transferring to another scheme
- No penalties for changing your monthly contributions
- They must allow flexible lump-sum and regular contributions
- It must have a default fund if you don’t want to choose where your money is invested
Anyone can set up a stakeholder pension. You don’t have to be employed, receiving benefits, or have met other requirements like National Insurance contributions. You can set one up at any age, too. You can even set one up as soon as your baby is born, to give them a great start to their retirement fund!
Stakeholder pensions won’t eat into your long-term savings compared to other pension options, because the fees are so low in comparison.
Find out more about how stakeholder pensions work in our article here.
If you’ve decided it’s the retirement option for you, keep reading to find out how to get a stakeholder pension!
Like any financial decision, take your time to research the options available.
You can have a stakeholder pension alongside your company pension (and, in fact, almost all new employer pension schemes are stakeholder pensions, too). Or, you can use it as your only pension plan. It’s up to you. If you’re not sure, it’s always a good idea to seek independent financial advice.
The Government has Pension Wise, a free advice service to help you make important decisions about your pension plans. You can also try a service like My Pension Expert, who offer impartial advice to help you decide what to do. If you choose to use their service, they take a small commission (there’s no up-front fee for you).
Similarly, you should also work out how much you can afford to contribute into your pension. Or, if you want to have a certain retirement income, use the Nutmeg Pension Calculator to gain an idea of what you’ll need to save each month. This will give you a better idea of how much the fees and charges will cost you, too.
Step one: Shop around
First of all, find out if your employer offers a stakeholder pension scheme. Make sure you check your previous pension pots from other jobs, too. It’s easy to lose track – you may already have a stakeholder pension offering just what you need!
Getting a new stakeholder pension is fairly straightforward. Insurance companies, banks, investment companies, and building societies offer stakeholder pension plans. Consqeuently, it’s all about finding one that suits your plans and needs.
Find a few providers that interest you. Ask for the ‘key features’ document, then compare:
- Fund charges (cannot be above 1.5% but are often lower)
- Who runs the fund (what’s their reputation?)
- Which funds the provider invests in (UK or global? Diverse investments?)
- Your options (and fees) when you crystalise (take) your pension
Remember, it can get confusing to know which pension is a stakeholder pension or other type of pension plan. If you’re unsure, it’s always best to seek independent financial advice.
Let’s look at the impact of fund charges in more detail. Notably, they cap at 1.5% for the first 10 years – but as many providers offer below that, even a difference of 0.02% has a noteworthy effect on your final pension pot.
For example, let’s say you have £10,000 in your pension pot. For one year, at 1.5%, that’ll cost £150.
In contrast, a fund charging only 1% for the first 10 years, on the same fund, costs you £100 a year. That’s £50 saved from fund charges.
As a result of increased contributions and compound interest growing your pension fund, these minor differences quickly make a major difference.
Step three: Check for extra discounts
First of all, discounts should never be the main reason for choosing a product. However, keeping an eye out for special offers might help to boost your pension even further.
Some providers offer incentives if you already have (or open) other products with them, such as a bank account or home insurance policy, although you should always read any fine print before you sign.
If these are things you need anyway, it’s worth investigating. However, if it’s a provider offering every financial product under the sun, be careful. As a result of putting everything into one company, of it folds, it affect a lot more than just your pension! Similar to investments, spread your risk by using different providers.
The Key Features Document is maybe the most important paperwork to check: it outlines the funds that the stakeholder pension invests in. How well your pension performs will depend on the funds you pick and how they perform.
This puts all the burden of choice onto you, and you might feel that you don’t know how to pick a good fund. Reduce the risk of poor decisions: spread your investment. Choosing a range of funds to invest in almost certainly helps to spread some risk.
If you’re unsure about this, your stakeholder pension provider must offer a default fund. This is seen as a lower-risk fund suitable for MOST people – not everyone.
If you want to choose where your money is invested:
There are various types. Equity funds form the backbone of many pension investment strategies. They invest in the shares (equities) of companies listed on the stock market.
Long term, equity funds have proved to produce impressive returns, but short term they could fall a lot. Ultimately, only invest in this type of fund if you’re looking to put your money in for at least ten years.
Another option stakeholders offer tracker funds (which mirror the performance of a whole market e.g. the FTSE 100). You can also choose from specialist funds such as income funds (which invest in firms providing large dividends), those focusing on a specific area of the stock market, and overseas funds.
Other funds include cash funds, bond funds, property funds, managed funds, lifestyle funds, With Profit funds and ethical funds. The Money Advice Service has a useful guide that will take you through your options.
Once you’ve decided which pension is for you, it may be cheaper to use a specialist pension broker. These arrange your pension without advice and refund some or all of their commission from the providers back into your fund.
Step six: Calculate your savings
Whether it is better to buy direct or via a discount broker depends on how much you’ll save and the provider you choose.
Each broker offers a different deal. Once you have chosen your provider and your funds, check with the brokers as it may be cheaper to buy through them.
Finally, 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.