What is a Stakeholder Pension?
Stakeholder pensions have been a point of contention amongst government and pension providers for some time. Introduced in 2001 in an effort to encourage those on low and medium incomes to save more for retirement, their low uptake has led many to suggest that the scheme has been a failure. The ‘failure’ of stakeholder pensions has led to the proposed introduction of a new Personal Account that is likely to perform the tasks intended by those who established the stakeholder scheme.
That said, stakeholder pensions can present an attractive option for those looking for a low charge arrangement. They are flexible and cheap, and are available from many high street financial providers. Furthermore, if you work for a company that employs five or more people, your employer is obliged to provide the opportunity for you to join a stakeholder pension scheme unless they offer a comparable alternative.
Stakeholder Pension RulesStakeholder pension schemes are regulated by the Pensions Service, and must adhere to a strictly enforced set of rules. To begin with, management fees are statutorily limited. Fees for the management of a stakeholder pension opened on or after 6 April 2005 must not exceed 1.5 per cent annually. After ten years, if the pension holder is still a member of the scheme the cap is reduced to 1 per cent. If you entered a scheme before this date your cap rate will remain at 1 per cent unless you switch providers.
Similarly, pension managers may not charge pension holders a fee for entering or exiting a scheme. As such, you may change pension providers at will, without incurring financial penalty – although the ten year capping period will recommence every time you switch to a new provider.
Another of the most significant advantages of stakeholder pensions is the low minimum for initial investments. A stakeholder pension can be opened with an initial contribution of just £20. Some pension managers accept even lower initial contributions, although there is no legal necessity for them to do so. Furthermore, pension managers have a fiduciary responsibility to pension holders; this means that the funds must be run in the interest of the members, and should be subjected to rigorous oversight procedures. As such, a stakeholder pension may well be a good choice for those who wish to make a low-risk investment.
Stakeholder Pensions For EmployersIf you are an employer and you have five or more employees, you have an obligation to provide access to a stakeholder pension scheme under the Welfare Reform and Pensions Act 1999. For the purposes of pension provision, employees are only counted if they earn more than the National Insurance lower earnings limit. This is set at £95 per week or £412 per month for 2009-2010.
You can exempt your business from these obligations by providing access to an occupational pension scheme. This must be available to all members of staff within one year of them commencing work for you. You must contribute the equivalent of at least 3 per cent of each relevant employee’s earnings to the scheme.
Stakeholder pensions are still popular amongst those looking for a safe, cheap way of saving for retirement. You may also wish to look at the other articles in this section for a broader view of the types of pension schemes on offer.