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Retirement Finance

Pensions: What is a stakeholder pension?

Steak holder pensions are modern pensions, usually, for self-employed people, companies can also use them for auto-enrolment. Stakeholder Pensions will allow holders to supplement their income in retirement. They are not a replacement for the old-age pension (at least not at the minute). You can still get the old style personal pension. Still, the charges and fees are higher, stakeholder pension fees are capped by the Government.

The Advantages

Standards, this is the key benefit of the stakeholder pensions. The Government stipulates four minimum requirements for a Pension company’s pension scheme to be considered a stakeholder pension:-

  •  Lower charges, maximum fees are 1% of the value of the pot after the first 10 years before that it is 1.5%, offsetting the initial setup charges
  • Flexibility, you can stop and start payments at any time and adjust your monthly premium/ investment. You can also switch to a different provider free of charge.
  • Independent Security, the pension must have independent trustees
  • Easy start-up, these plans can be started from as little as twenty pounds a month.

Why Not Just Save with and ISA

Isas are an efficient tax-saving vehicle, but the lack one great benefit of the pension plan; tax relief. Whereas in an ISA your taxed income can be saved or invested, and your income or growth is tax-free. A Pension has these same benefits, but any money you pay in you get tax relief for up to an annual limit of £40,000 at the moment. For basic rate tax payers, the relief is paid directly into the pension, Higher rate payers will have to reclaim the difference through their tax return. So basically for the same cash, you pay in the Government throws in the tax you paid on that money. The total grows tax-free throughout the pension.

What Do I Do With My Pension Pot?

Once you reach your retirement you get access to your pension pot, then you have to decide how you are going to use it (detail in another post ). But you can:-

  • Buy an annuity, guaranteed income for life.
  • Cash in, 25% tax-free the rest taxable
  •  Drawdown, take a smaller payment for a longer time.
  • Take lump sums, 25% of each is tax-free.

I hope this has helped, please read our other posts.