Stakeholder Pension Scheme - Is It The Right Choice For You?
Stakeholder pensions are just one of the many options available to UK workers who want to set money aside for retirement. You could invest in a stakeholder pension scheme alongside your current workplace scheme, or opt out of the workplace pension and put all of your money into a stakeholder scheme instead. If you want, you could even establish multiple stakeholder schemes through different providers.
The question to ask is whether a stakeholder pension is right for you. As with most things relating to pensions, there is no easy answer to that question. The individual must look at the stakeholder pension in light of a long list of factors, including:
- current financial position
- eventual retirement goals
- current and future income
- current assets and liabilities
- other pension options
- other investment options.
A decision to invest in a stakeholder pension should only be made after consulting with a financial advisor who has the right kind of experience. Used correctly, the stakeholder pension scheme could do very well in terms of providing retirement income. Used incorrectly, and you could lose a lot of money.
Basics of Stakeholder Pensions
What are stakeholder pensions and how do they work? A stakeholder pension is a form of personal pension that exists as a contract between the investor and pension operator. This differs from a workplace pension primarily in relation to contractual obligations.
A workplace pension exists as a contract between an employer and pension provider. Both parties to the contract have certain legal obligations they are required to fulfil. Individual pension members are just that – members without any specific contractual obligations. A stakeholder pension is entirely different. There is no employer to act as an intermediary between member and pension provider. Instead, the individual investor is responsible for maintaining his or her contractual obligations.
In order to qualify for a stakeholder pension, a scheme must meet certain requirements set out by the government:
- Limited Charges – Pension operators are limited in terms of the fees and charges they can assess. This is one of the things that makes stakeholder pensions so attractive. You will pay less in total fees with a stakeholder plan than you will any other kind of pension.
- Minimum Contributions – Pension providers must allow minimum contributions as low as £20. The government set this regulation in place to make stakeholder pensions accessible to as many consumers as possible.
- Flexible Contributions – Pension providers must also allow individual investors to determine when, and how often, they plan to contribute. You could contribute to your stakeholder pension scheme every week, or you could make a single lump sum contribution on an annual basis. It's entirely up to you.
- Free Transfers – Pension providers are not allowed to charge for transfers into or out of the stakeholder pension. It would not cost you a pound to take the money from your current workplace pension and put it into a stakeholder pension, at least where the stakeholder pension provider is concerned.
- Default Fund – Every stakeholder pension must have a default investment fund in case investors do not want to have to make investment decisions. Information regarding the default fund must be made freely available to investors.
The rules establishing what qualifies as a stakeholder pension are the primary source of the scheme's benefits. Stakeholder pensions tend to be cost-effective, easy to manage, and easy to keep track of throughout the investment term. As an added bonus, the investments available through stakeholder pensions tend to be more numerous than what you would find in a standard workplace pension.
Stakeholder Pensions and Employers
Most employers used to be required by law to offer a stakeholder pension scheme in conjunction with any workplace pension they offered employees. That has since changed with the implementation of auto-enrolment. Now, offering a stakeholder pension is optional. When an employer does choose to offer one, certain conditions apply.
First, a stakeholder pension being made available through an employer does not change how the contract is set up. The pension is still a contract between the investor and the pension operator. In such a case, the employer only acts as a facilitator – nothing more, nothing less.
Second, all qualifying workers have the choice to opt out of a workplace pension scheme offered via the auto-enrolment mandate. Some choose to do this in order to take advantage of a stakeholder pension being offered through the employer. Choosing the stakeholder pension over the workplace pension gives the worker a bit more control over how his or her money is invested.
Finally, employers can contribute to stakeholder pensions should they decide to do so. Nevertheless, how much they contribute is entirely up to what the employer and employee agree upon. There is no set amount, even if the employee has opted out of a workplace pension in order to invest in a stakeholder scheme.
Who Would Benefit from a Stakeholder Pension Scheme
Now that you know the basics of how the stakeholder pension scheme works, you might be wondering who would benefit from this option? Quite a few people. Stakeholder pensions are an excellent compromise between a workplace pension with absolutely no control and a self-invested personal pension in which the individual is entirely responsible for everything.
Stakeholder pensions can also act as a helpful supplement to existing workplace pension schemes. For example, say you are invested in your company's pension through auto-enrolment but you want to take advantage of some investment opportunities that scheme does not offer. You can open a stakeholder pension, as a supplemental scheme, to put your money into those alternative investments.
The primary beneficiaries of stakeholder pensions are:
- Self-Employed Workers – Although the self-employed do have access to conventional workplace pensions through the government's NEST programme, NEST pensions are not necessarily always the best option. The stakeholder pension scheme is a very accessible option for the self-employed.
- Company Directors – Directors of small companies have limited options in terms of their pensions. The stakeholder pension scheme is one of them. It can provide a nice pension benefit without having to delve into more complicated workplace pensions.
- The Unemployed – Even the unemployed can invest in a stakeholder pension if they have the income to do so. The stakeholder pension is usually a better option than savings, given that returns tend to be higher.
- Those with Extra Money – Lastly, the stakeholder pension is a good choice for someone who has extra money not being dedicated to their workplace pension or additional National Insurance contributions. As long as you have extra money, you might as well put it away in order to increase retirement income.
Accessing a Stakeholder Pension
When it comes time for you to finally access the money in your stakeholder pension scheme, it will work the same way as any other defined contribution scheme. You will have a long list of options beginning with the purchase of an annuity. You may be able to buy an annuity from your current pension provider, or you can purchase one elsewhere if your current provider does not offer one or you are not happy with what is on offer.
Other options for accessing the pension include:
- taking a single lump sum payment
- entering a drawdown contract
- transferring it into a QROPS (for overseas retirement)
- utilising it like a bank account.
New pension rules stipulate that you will be able to take the first 25% of your stakeholder pension tax-free. The remaining portion is subject to income tax in whatever year or years you receive it.
The stakeholder pension scheme is a good option for some, but not for everyone. Hopefully, this guide has answered some of your questions. The next step, if you are considering a stakeholder pension, is to take a look around to see what's out there. Then sit down with a financial advisor to go through your options, making sure whatever you decide lines up with your overall financial plan.
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