Tim Leonard
Stakeholder pensions were introduced by the government in 2001 with the aim of encouraging people on low to moderate incomes to save more for their retirement. This was hoped to be achieved by offering a simpler and cheaper alternative to the personal pensions that were available at that time.
A stakeholder pension is still a flexible and affordable way to save into a pension today, with stakeholder pension providers obliged to allow low contribution amounts and the option to stop and start payments whenever you want. To qualify as a stakeholder pension, charges have to be below 1.5% and stakeholder pension transfers must be free as well.
Read on to learn more about how stakeholder pensions work, how they compare with other personal pensions, and whether a stakeholder pension scheme might be suited to you.
What is a stakeholder pension?
A stakeholder pension is an individual pension designed to make pension saving accessible to all. It is also a type of personal pension, but differs in that stakeholder pension providers must follow strict rules on contributions and charges. An employer may offer a stakeholder pension as their workplace pension scheme, or you can open one for yourself, making them an option worth considering if you’re self-employed or not working.
Other types of personal pension and self-invested personal pensions (SIPPs) are options you might want to explore before taking out a stakeholder pension.
Stakeholder pension scheme features
A stakeholder pension must always:
- Allow monthly contributions as low as £20
- Let you stop and start contributions penalty-free whenever you want
- Charge no more than 1.5% of your fund value (and 1% after 10 years)
- Be able to be transferred without charge
- Have a default fund where your contributions will be invested if you don’t want to make a choice.
How does a stakeholder pension work?
All stakeholder pensions are defined contribution pensions. This means the contributions you make, and those of your employer if it is a workplace pension, are used to create a pension pot which your stakeholder pension provider will invest and manage on your behalf. Pension tax relief will be added to eligible contributions and invested too. The retirement value of a stakeholder pension will depend on how much you pay in and the performance of your investments over time.
Stakeholder pension vs personal pension schemes
All of this is also possible through a standard personal pension and a SIPP. But what makes stakeholder pension schemes distinct are the minimum standards set by the Government.
Stakeholder pension contributions
A stakeholder pension must allow contributions as low as £20 a month to try and make them a viable option for anyone wanting to save for their retirement. Stakeholder pension providers must also be willing to accept money at any frequency. This means you can pay in at regular intervals or on an ad hoc basis. They must also not have restrictions on the method of payment such as direct debits and cheques. The only types of payments they may be able to refuse are cash, credit cards and debit cards. Providers of personal pensions, on the other hand, can set their minimum contribution amounts and other payment requirements as they see fit.
Stakeholder pension fees
A stakeholder pension cannot charge more than 1.5% of the value of your pension fund annually for the first 10 years that you have the pension, and then no more than 1% after that. With other personal pensions, fees could be higher.
Added flexibilities
In order to make stakeholder pensions as flexible as possible, savers must be allowed to stop and start their contributions when they like, without any penalty. Stakeholder pension transfers between providers must also be permitted without additional charges from the stakeholder pension provider. Neither rule formally applies to other personal pensions (although some may adopt them nonetheless).
Default investment option
To help those who don’t wish to make a choice over where their contributions are invested, stakeholder pensions must offer a default investment fund where contributions will go if no other selection is made. A default fund must be a lifestyle option, which automatically and gradually switches funds into less risky investments to try and protect your pension pot from significant falls as you near retirement.
How much can I contribute to a stakeholder pension?
When paying into a stakeholder pension, you’ll only receive tax relief on the contributions that are within your annual allowance limit. For the 2024/25 tax year, this will be the lower of 100% of your earnings or £60,000. If you have other pensions that you pay into, remember that the limit is shared across them all, rather than being available for each pension.
If you exceed your annual allowance, you will face tax charges which will effectively negate any tax relief you could get on contributions over the annual allowance.
» MORE: Learn about pension contribution limits
Taking retirement benefits from a stakeholder pension
You must usually wait until you’re 55 to start taking benefits from a stakeholder pension, rising to 57 on 6 April 2028. Once you hit the required age, you’re able to withdraw up to 25% of the pension fund you’ve accumulated as a tax-free lump sum.
Whatever you don’t take can then be used to derive an income, either by buying an annuity or through income drawdown, or a combination of both. It’s also possible to take your entire pension fund in one lump sum, but the tax implications for this means it’s not usually seen as a sensible idea.
» MORE: Accessing your pension savings
Can I cash in a stakeholder pension early?
The only reasons you may be allowed to cash in a stakeholder pension early are if you’re suffering from extremely poor health or a terminal condition, or if your line of work grants you a lower protected retirement age.
Can I transfer my stakeholder pension?
Yes, it is possible to transfer a stakeholder pension and stakeholder pension providers must allow this option at no cost. The types of pension you could potentially transfer to include another stakeholder pension, a personal pension or SIPP, or a workplace pension.
» MORE: Learn about pension transfers
Are stakeholder pensions worth it?
A stakeholder pension may be suited to you if your employer doesn’t offer a workplace pension or you’re self-employed and want to save for your retirement. The flexibility provided by the low minimum contributions and ability to stop and start your payments when you please may also make it a worthwhile option if you’re not working, but have money that you want to put into a pension when you can.
There’s also nothing to stop you having a stakeholder pension running alongside any other pension you might have, although you’ll only receive tax relief on contributions up to your annual allowance.
If you’re in any way unsure whether a stakeholder pension is suitable for you, or how best to access the funds you’ve already built up in a stakeholder pension scheme, you should seek pension advice.
How to open a stakeholder pension
If you’re offered a stakeholder pension through your work, your employer will have selected a group stakeholder pension scheme provider who will be behind your pension. It’s likely your employer will help coordinate the setup process, and that the provider will get in touch with you with the necessary forms to complete. Should your employer choose a stakeholder pension to satisfy its obligations under auto-enrolment, the fees will be capped at an even lower 0.75% too.
If you’re considering taking out a stakeholder pension for yourself, a number of pension providers, banks and insurers offer schemes. Although stakeholder pension schemes must adhere to the minimum standards set by the Government, providers may accept even lower contributions or charge lower fees than the rules require. Different schemes will offer different investment options too.
For this reason, you should always compare the various stakeholder pensions available in the market to find the one most suitable for you.
Be sure to consider other pension alternatives such as SIPPs too, particularly if you’re looking for the widest possible choice of investment options.
WARNING: We cannot tell you if any form of investing is right for you. Depending on your choice of investment your capital can be at risk and you may get back less than originally paid in.
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