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 to getting a stakeholder pension.
- 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
Stakeholder pensions are simple, cheap and flexible. They have to stick to a few rules: 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 £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, set up a regular standing order, or do a mixture of the two.
They have the same rules as any other pensions when it comes to contribution limits, tax-relief, and the minimum age for withdrawals. 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 stakeholder pensions is that the charges are low, so won’t dramatically erode your savings over the long term.
We have lots of advice on whether to choose a stakeholder pension or not in this guide to Stakeholder Pensions. However, if you’ve already decided to opt for one, the next step is choosing the right provider.
Step one: Shop around
Various financial services companies such as insurance companies, banks, investment companies and building societies offer stakeholder pensions. It’s worth contacting as many providers as possible and asking for the key features documents.
When you look through the document, consider:
- the fund’s charge – the annual management charge (also known as the AMC) is key. It cannot be above the cap, but many providers charge less.
- the company running the fund – and their reputation for performance and robust finances.
- what the fund invests in – so, for example, does it invest mostly in the UK or abroad? Is it a mix of investments? Ultimately it’s up to you where you are happiest putting your money, but you need to be aware of the investment strategy of the fund or funds you are considering.
The impact of the AMC cannot be understated. If, for example, your provider charges 1.5% like Forester Life’s Personal Pension Plan, having £10,000 in the scheme for one year will cost £150. Meanwhile, stakeholder schemes from the likes of L&G and Aviva will cost £100, because they charge 1%. Over the long term, the additional cost will really add up.
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.
The Key Features Document will also outline 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. You can reduce the risk of making the wrong decision, by spreading your investment around. If this feels too onerous, all stakeholder pensions have to offer a default fund. This won’t be right for everyone, but is designed to be a reasonable option for most people.
If, however, you decide you want to choose how and where your money is invested, pick 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 a wide range of investment funds.
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. Only invest in this type of fund if you’re looking to put your money in for at least ten years.
Most 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 – who arranges 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 will depend on how much you are able to save, and which provider you decide to go with. Each broker will offer a different deal, so once you have chosen your provider and your funds, check with the brokers to see if it would be cheaper to buy through one of them.
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.