The Stakeholder Pension
These may be offered through some employers or you can start one yourself. Stakeholder pensions are money purchase pensions and must have certain features. Some of these are:
- limited charges;
- low minimum contributions;
- flexible contributions;
- penalty-free transfers;
- a default investment fund – a fund your money will be invested in if you don't want to choose.
Stakeholder pensions at work
If one is offered through your employer, they will have chosen the pension provider and they may have arranged for contributions to be paid from your wages or salary. The employer may contribute to the scheme.
Your employer deducts contributions from your pay and sends them to the pension provider. The pension provider claims tax relief at the basic rate and adds it to your fund. If you are a higher rate taxpayer, you will need to claim the additional rebate through your tax return.
How does it work?
Money purchase pensions build up a pension fund using your contributions, investment returns and tax relief. It helps to think of money purchase pensions as having two stages:
Stage 1
The fund is usually invested in stocks and shares, along with other investments, with the aim of growing the fund over the years before you retire. Remember though that the value of investments may go up or down.
Stage 2
When you retire you can take a tax-free lump sum from your fund and use the rest to secure an income – usually in the form of a lifetime annuity.
The amount of pension income you’ll get will depend on:
- how much you pay into the fund;
- how much, if anything, your employer pays in;
- how well your investments have performed;
- what charges have been taken out of your fund by your pension provider;
- how much you take as a tax-free lump sum;
- annuity rates at the time you retire; and
- the type of annuity you choose.
The amount of pension income you’ll get will depend on:
- how much you pay into the fund;
- how much, if anything, your employer pays in;
- how well your investments have performed;
- what charges have been taken out of your fund by your pension provider;
- how much you take as a tax-free lump sum;
- annuity rates at the time you retire; and
- the type of annuity you choose.