Stakeholder Pensions Explained
The pension scheme is the backbone of many employee benefit offerings. Indeed, in many cases employers will only offer a pension, with no other additional benefits. Bearing in mind the importance of a pension for most employees, it is surprising that so few actually understand the nature of their scheme. Stakeholder pensions are frequently offered as an employee benefit, and were particularly popular upon their introduction in 2001. However, they are frequently misunderstood.
Stakeholder pensions were introduced at the beginning of the decade, with the stated purpose of encouraging higher levels of saving amongst those on relatively low incomes. As such, they are 'low charge' pension schemes; the costs associated with maintaining a stakeholder pension are generally lower than those associated with other types of occupational or private pension. The levels at which pension providers may charge for stakeholder schemes are set out in law; specific legislation governs aspects such as flexibility for employees or other contributors to take breaks from contributions, as well as the charges that can be made by providers.
In relation to their initial aims, stakeholder pension schemes have basically failed. Levels of savings amongst those on low incomes has remained fairly steady, even after the introduction of these low cost pension plans. However, they still represent a potentially attractive option for those looking to contribute to a pension, and their low-cost nature has encouraged employers to introduce them as part of their benefits package. If you have a stakeholder pension, or are considering taking one out privately (these schemes are not limited to occupational applications), there are a number of aspects that you should understand.
In the first instance, the charges for managing your pension scheme are capped 1.5% per annum for the first ten years of the scheme's life. After this, the cap on charges is reduced to 1% per annum. Depending on the size of your contributions, this can make for an exceptionally cheap pension plan. Furthermore, providers are not allowed to introduce any financial barriers to entry to or exit from the scheme. As such, if you choose to move your pension elsewhere you will not be charged to do so. Furthermore, there are no set-up costs. This is complemented by the very low minimum contributions required by a stakeholder pension scheme; a single contribution of £20 is sufficient to open a pension of this sort.
Aside from the low charges, perhaps the most significant advantage of stakeholder pensions is the fact that scheme members can choose to stop and start contributions whenever they wish, and with no financial penalty. This is of particular benefit for those who are in precarious employment, or self employed individuals who are unsure when they will be earning. If you wish to put away money for retirement but have an unpredictable income stream, a stakeholder pension might well be the right option.
As stakeholder pensions were deemed to have not resulted in an increase in saving amongst those on a low income, the government has recently announced that they will be introducing a scheme known as Personal Accounts, intended to tackle this problem. You may wish to investigate this new scheme if you are on a low income.