Understanding Stakeholder Pensions
One of the government’s top financial priorities is to give individuals access to affordable secure pension schemes. This priority has been the subject of considerable thought in recent times, in the wake of the recent ‘pensions crisis’.
An increasing number of employers now offer occupational pension schemes, whereby employees are given the option to contribute a part of their pay packet to a pension plan. In many cases, the employer then makes their own contribution relative to the amount paid in by the employee.
The BasicsA large number of employees still do not have access to this type of pension scheme, however, and stakeholder pensions are designed with these individuals in mind. This type of pension scheme is a Personal Pension, into which you place money in order to build your total fund. On maturity (generally the date of your retirement), the total fund is available to you for the purpose of purchasing an annuity from a life insurance company, which will act as a regular income until your death.
Stakeholder pensions are uniquely well-suited to those who are self-employed or working but unable to afford an occupational pension scheme. A stakeholder pension allows the contributor to stop and start payments when it suits them, and they are subject to stringent government guidelines that cover basic elements such as the amount that the pension provider can charge in management fees and a minimum level of security for your money.
Furthermore, the guidelines state that you can make a minimum contribution of only £20 and can ‘pause’ repayments as often as you wish without incurring any penalties. These features make stakeholder pensions particularly valuable for those on low or irregular incomes.
Pension ManagersWhen you put money into a stakeholder pension scheme, the responsibility for this money is passed to a pension manager. Your money is then invested, generally in stocks, with the ultimate aim being to increase the amount of money in your fund. If your fund performs well, then you should end up with a considerably larger sum at maturity than the total amount that you have contributed.
If your fund is not performing well, you are free to change providers at any time. Furthermore, the guidelines on security mean that there is a legal framework to which managers must adhere in order to keep your money safe.
Highly FlexibleAlthough a stakeholder pension is highly flexible, and is available to everyone regardless of their employment status (you can even contribute if you are unemployed), it may not necessarily be the best choice for you. If you have a number of pension options from which you can choose, then there are certain key questions that you need to consider.
In the first instance, it is important to note that a stakeholder pension is intended as an alternative for those who do not have access to an employer-sponsored pension scheme. If you have access to such a scheme (in which your employer makes contributions in addition to your own), then it is likely that this will be a better option as your pension ‘buying power’ is increased considerably with an additional contributor. If this is not the case, however, then a stakeholder pension may well be worth considering.