Stakeholder pensions are a type of personal pension. They have to meet certain standards to ensure they’re flexible and have a limit on annual management charges. The minimum payments are also low and you can stop and re-start payments whenever you wish.
How stakeholder pensions work
Stakeholder pensions work in much the same way as other personal pensions. You pay money into your pension to build your pension fund. The managers of the stakeholder pension scheme invest the pension fund on your behalf.
The value of your pension fund will be based on how much you have contributed and how well the fund’s investments have performed.
It is best to make regular contribution payments if you can, but you can stop payments for a while if you need to without it costing you anything. However, that will mean you have a smaller pension fund unless you make extra payments later.
When you reach the age when the stakeholder pension can be paid, you can use the fund you have built up to buy an Annuity.
How stakeholder pensions differ from other personal pensions
By law stakeholder pensions must meet a number of minimum standards to make sure they offer value for money, flexibility and security. The standards include:
Limit on annual management charges
Managers can charge fees of up to 1.50% of your pension fund each year for the first ten years you hold the product, and thereafter up to 1%
You can switch to a different pension provider without the provider you leave charging you. Contributions can start from as little as £20, and can be paid weekly, monthly or at less regular intervals. You can stop, re-start or change your contributions whenever you want – there are no penalty fees
Contribution levels and tax relief
You can save as much as you like into any number and type of pensions, including stakeholder pensions. You will get tax relief on contributions of up to 100 per cent of your earnings each year.
This is subject to an ‘annual allowance’ which has reduced from £255,000 for the 2010-2011 tax year to £50,000 for the 2011-12 tax year.
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