What is a Stakeholder Pension?
Stakeholder Pensions are a form of Personal Pension where certain conditions, laid down by the Government, must apply. These conditions relate to the maximum amount that the Pension Company may charge for the product, the minimum level of contribution they must accept and the abolition of a fixed frequency for your contributions.
When the idea was first introduced it was thought that Stakeholder Pensions would be targeted at individuals earning between £9,000 and £18,000 per year. However as they have evolved it has become clear that they can be equally suitable for people who earn more than £18,000. You’re allowed to make contributions to a Stakeholder Pension and indeed all personal pensions even if you are not working or receiving any income.
The amount you can contribute to a stakeholder pension depends on your income, but regardless of these factors you will be allowed to save at least £3,600 gross a year (£300 per month) towards your retirement.
How much can I contribute?
You will be allowed to contribute up to £3,600 per year (£300 per month) without any reference to your income or your age.
If you wish to pay more than £3,600 this may be allowed but this does depend upon the amount of your earnings. Although there is no maximum level that can be paid into a Stakeholder Pension there is a limit to the amount which receives tax relief. This limit is 100% of your earnings and is capped at the annual allowance of £50,000.00. If you exceed this limit it is likely your pension will be tax inefficient.
There is also be an overall "lifetime allowance" on the total amount of money you can save in your pension and still benefit from tax relief.
Both the Lifetime allowance and the Annual Allowance count across all of your pension schemes, including occupational schemes. Please bear in mind that if you are a member of a Defined Benefit Scheme, such as the NHS Pension Scheme, then your "deemed contributions" will be different from the figure you actually pay in, we therefore recommend you seek specialist advice in this area to calculate where you stand against the annual allowance.
Do I get Tax Relief on my Pension Contributions?
The Government allows Income Tax relief on most pension contributions. In the case of Stakeholder Pensions any contributions you make are entitled to immediate Income Tax relief at a rate of 20%.
For example, if you contribute £80 each month then the Pension Company will be allowed to reclaim from the Government £20 of tax relief on your behalf. This tax relief is added to your plan alongside the payments you, and if appropriate, your employer elects to make. This means the actual amount invested in your Stakeholder Pension plan would be £100 per month.
Do I qualify for extra tax relief if I pay Higher Rate Income Tax?
Yes, at present the HM Revenue and Customs will allow Higher Rate Tax payers who make pension contributions to claim up to 40% tax relief. As only 20% is granted at source you must claim the balance from the HM Revenue and Customs. Your Pension Company or Tax Office will provide you with the required form to claim this extra tax relief.
Will I pay any tax if I surrender a policy early?
You are able to make contributions to as many different pensions schemes as you like at any given time. These will all be subject to the Annual and Lifetime Allowances.
If you need assistance to understand your situation in the light of the new rules, please contact us.
What is concurrent membership?
Concurrent membership is making payments to a Stakeholder Pension at the same time that you are a member of your employer's 'company' pension scheme.
Whilst you are allowed to a have as many Personal Pension or Stakeholder Pension plans as you like, the total contributions you make should not exceed the normal contribution limits.
When can benefits be taken from a Stakeholder Pension?
You can take your benefits at any time from age 55 to 75. This applies whether you are male or female. You do not need to stop working or reach state retirement age to be able to draw benefits from your Stakeholder Plan.
If your health is poor and you are classified as unable to work, then you may be able to draw benefits before age 55 (please note: there are strict rules regarding ill health early retirement. If you believe you could qualify for such early retirement you should seek advice from your pension provider).
You must draw your Stakeholder Pension benefits on or before your 75th Birthday.
Must I take my Stakeholder benefits as a pension?
At the time you choose to draw your benefits you can choose to take up to one quarter of the value of the pension fund as a lump sum. Currently these lump sum payments are tax-free.
The balance of the fund has to be taken as an income, although that does not necessarily mean you must immediately buy an annuity. For further details of your options at retirement you may wish to talk to an adviser. You can contact us by clicking on the button marked 'Make contact now' shown on the right.
What if I die before I draw my benefits?
The value of your Stakeholder Pension fund is normally returned to your next of kin if you die before you draw your pension. If your pensions are under the lifetime allowance, it is likely that the payment will be free of any Inheritance Tax. However, this cannot be guaranteed. You can give an indication of those people you would prefer actually received the benefit were you to die, either by placing your Stakeholder Pension plan in Trust or alternatively by completing a 'Nomination' form.
Which Stakeholder Pension will be best for me?
Stakeholder Pension plans offered by the many different Pension Companies all have to apply the same rules about contributions, benefit structures and maximum charges. However the amount that they charge, within the maximum charge of 1.5% per annum and the choice of investment funds available is a matter for each of them to decide upon.
It is important to have an understanding of risk when selecting your investment funds. With so many different schemes to choose from, we suggest that you seek advice before deciding the best pension for you. If you need assistance then you can contact us.
What do I need to think about when selecting a Stakeholder Pension?
Check if your employer is setting up a stakeholder pension and, if so, which Pension Company is responsible for running that arrangement. It may be that this scheme might be suitable for your needs.
If you already have a personal pension or are part of an occupational pension scheme, check how much you or your employer will be allowed to contribute to a new Stakeholder pension plan.
It is likely that you will wish to know how your contributions are to be invested, All Stakeholder Pension Plans offer a default investment fund but many offer a choice of funds where your money can be invested. If your Pension Company does offer an investment choice you should check that there are no extra charges for investing in a fund that is not the default investment fund.