|Bookmark this page! |
A stakeholder pension is a new type of pension that was introduced in 2001. With lower fees, it's meant to be simpler to understand than other pensions on the market, allowing a cheap retirement savings plan for those who can only contribute small amounts.
Who is Eligible?
People under age 75 who are working can contribute up to 100% of their yearly earnings into a pension, provided it does not exceed the maximum of £245,000 for the 2009 tax year. This maximum will increase in 2010 to £255,000. Anyone contributing more than £3,600 per annum may keep doing so for five years after they stop working. Retired persons and those not working can contribute up to £3,600 per annum.
Employers with five or more employees must provide some kind of pension. It's likely the employer will choose a stakeholder pension, to which he or she may contribute on an employee's behalf. But employers with fewer than five workers do not have to provide access to pensions, affecting some 750,000 workers.
Employees in a company pension scheme may simultaneously contribute to a separate stakeholder pension if they earn less than £30,000 per annum. They may contribute at most 15% of their earnings toward this stakeholder pension.
People who contribute to pensions get tax relief for those contributions, even if they don't pay any taxes. Basic rate taxpayers will see the tax relief automatically added to their pensions – effectively costing them £80 for £100 to be paid into the pension. Starting in the 2009 budget year, tax relief on pension contributions will be restricted for those earning £150,000 and over.
Fund managers take a percentage of contributions as their fee. Stakeholder pension providers are barred from charging more than 1.5% per annum for 10 years and more than 1% per annum thereafter. Many charge less than 0.5% per annum, significantly lower than what many other pensions charge.
The money is invested in stock market products to grow the pension. Upon retirement, people may take out a lump sum of up to 25% of the fund, tax-free. The rest is used to buy an annuity, guaranteed to pay income for the rest of one's life. Note that the annuity payments are considered income, so they will be taxed.
Stakeholder pensions can also be set up for non-earners such as children or stay-home mothers. These can then be paid into on the non-earners' behalf, offering greater flexibility and access.