Stakeholder pensions
These may be offered through some employers or you can start one yourself. Stakeholder pensions are money purchase pensions and must have certain features. Some of these are:
- limited charges;
- low minimum contributions;
- flexible contributions;
- penalty-free transfers;
- a default investment fund – a fund your money will be invested in if you don't want to choose.
Stakeholder pensions at work
If one is offered through your employer, they will have chosen the pension provider and they may have arranged for contributions to be paid from your wages or salary. The employer may contribute to the scheme.
Your employer deducts contributions from your pay and sends them to the pension provider. The pension provider claims tax relief at the basic rate and adds it to your fund. If you are a higher rate taxpayer, you will need to claim the additional rebate through your tax return.
How does it work?
Money purchase pensions build up a pension fund using your contributions, investment returns and tax relief. It helps to think of money purchase pensions as having two stages:
Stage 1
The fund is usually invested in stocks and shares, along with other investments, with the aim of growing the fund over the years before you retire. Remember though that the value of investments may go up or down.
Stage 2
When you retire you can take a tax-free lump sum from your fund and use the rest to secure an income – usually in the form of a lifetime annuity.
The amount of pension income you’ll get will depend on:
- how much you pay into the fund;
- how much, if anything, your employer pays in;
- how well your investments have performed;
- what charges have been taken out of your fund by your pension provider;
- how much you take as a tax-free lump sum;
- annuity rates at the time you retire; and
- the type of annuity you choose.
For more information about annuities and other retirement options, see Retirement options.
Use our Pension calculator to estimate the amount of pension income you could get when you retire. This is worked out from the level of regular contributions that you choose to pay into a personal or stakeholder pension. Just enter the amount you can contribute and it will calculate what your pension fund could be worth if it grows at certain rates each year.
The figures you see in the Pension calculator are estimates - they are not guaranteed. The actual pension income you receive will be affected by future changes in things like interest rates, inflation and investment growth.
Is it right for you?
You can check to see if a stakeholder pension might be suitable for you by trying our Stakeholder pensions decision tree. Alternatively you can download our Stakeholder pensions and decision trees factsheet from Publications, where you can also order it online.
Changing jobs
If you change jobs, you should check whether your new employer offers a pension scheme. You can continue paying into your stakeholder pension but you may find you'll be better off joining your new employer's scheme, especially if the employer contributes. Compare the benefits available through your employer's scheme with your stakeholder pension. If you decide to stop paying into a stakeholder pension, you can leave the pension fund to carry on growing, but check whether there are extra charges for doing so.
Starting one yourself
If your employer doesn't offer any pension scheme, you're self employed, or even not working, you can check to see if a stakeholder pension might be suitable for you by trying our Stakeholder pensions decision tree. Or you can get a free copy of our Stakeholder pensions and decision trees booklet. You can download or order it online – see Publications
If you decide on a stakeholder pension, you choose the pension provider yourself and make your own arrangements to pay contributions.
You can compare stakeholder pension features and costs at Compare pensions.