Stakeholder Pensions

1. The Stakeholder Picture

Stakeholder pensions are designed to provide a simple, low-cost pension arrangement.

1.1 Stakeholder schemes may be more basic than personal pensions.

• The choice of fund may be more restricted than with personal pensions.
• Advice without charge will be limited but you can choose to pay a separate fee for further advice.

1.2 They are normally established by investment and savings institutions (such as life assurance companies).

• Employers can offer their own schemes, managed by trustees, but only very large companies are likely to do this.

1.3 They can be offered directly to individuals or through employers.

• Most businesses with five or more employees have to designate at least one stakeholder pension scheme.
• If employees wish to contribute, the employer must offer to deduct their contributions from pay and pass them on to the provider.
• The employer does not have to make contributions to the employee's stakeholder pension, but can do so.
• Employees do not have to take out a stakeholder pension with the provider designated by the employer. They can invest their contributions with another provider, in which case the employer need not become involved, or they can decline to take out a stakeholder pension scheme at all.

1.4 Stakeholder pensions are designed to be easy to understand.

• They are money purchase arrangements, which means that the size of the eventual pension is not guaranteed. It will depend on the amount of money paid in, the investment performance of the fund, the level of charges deducted from the fund, how long you have to retirement and the level of annuity rates when the pension is paid.
• Pension providers offer various investment alternatives. For example, stakeholder pension members may be able to choose to invest in funds associated with specific geographic areas, or companies. But there must always be a 'default' option, for those who feel they do not have the time or expertise to make a choice about how their contributions are invested.

1.5 Stakeholder pensions are flexible.

• Individuals do not have to make regular contributions.
• Employers must allow members to stop, start or change the size of their contributions but some timing restrictions apply (see 2.3).
• They can move their pensions from one provider to another without any penalty.
• They can contribute as little as £20.

1.6 Stakeholder pension costs remain low.

• Annual management charges must not exceed 1.5 per cent (previously 1 per cent) of the value of the fund. Charges on stakeholder pensions set up before April 2005 are still capped at 1 per cent a year, and charges on newer arrangements must revert to 1 per cent (or less) after ten years.
• If individuals decide to move to another provider (for example, when they change jobs), the existing provider cannot impose any transfer charges or penalties.
• However, there may be extra charges for additional services eg where an employee needs advice on his or her pension position. If fees are charged, they must be provided for under separate contracts.