Pensions 101

What is a stakeholder pension?

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Stakeholder pension is not one of the most well-known types of pensions in the UK. This is because when employees are auto-enrolled into a pension scheme with their workplace, they don't get to choose which scheme they join.

It is mainly for people with a low income or the self-employed with an irregular income, giving the chance to all UK citizens to save for their retirement.

Learn more on what a stakeholder pension is, how it works and if it's the right option for you.

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What is a stakeholder pension?

Firstly, there are three types of main pensions in the UK:

  • State Pension
  • workplace pension
  • personal pension.

A stakeholder pension is usually a personal type of pension - meaning that the contract you sign with the pension provider is individual and arranged by yourself - but it can sometimes be offered as a workplace pension with the company's pension provider. When this scheme is offered by your employer it is often grouped with the rest of the workplace pensions and you're most likely auto-enrolled into it.

This pension is known for its flexible payments, low contributions and default investment plan of these funds.

How do stakeholder pensions work?

In a stakeholder pension you have to adhere to the government's strict rules and standards.

The minimum standards are:

  • Limited charges on management fees. In other words, management fees are capped at 1.5% a year the first ten years, then 1% a year thereafter.
  • Charge-free transfers when you decide to transfer any UK pension to your stakeholder one.
  • Low contributions, as little as £20 per month, and being able to stop and restart them at any point.
  • The pension funds are invested in a default investment program when you don't choose how to invest them yourself.

This is a defined contribution scheme as payments into this pot are from contributions made by you, and these contributions most of the time are getting invested for you. The value of this pension depends on these investments.

It is worth noting that investments are risky and that their value could go up and down. Your pension investments are at risk.

It is a very flexible type of pension, perfect for any UK resident who wants to aim to secure their financial future.

How much will I get when I retire?

Calculations are based on:

  • how long you worked and saved for - the longer the better
  • how much you contributed - the more the better
  • how well your investments have performed
  • whether your employer has contributed to it under auto-enrolment scheme rules
  • the pension provider's management charges

Based on these, your stakeholder pension is calculated when you decide you want to retire.

three types of pension

How does tax work with a stakeholder pension?

Tax for this type of pension works the same as it does with a personal or workplace pension. You are allowed to withdraw a 25% tax-free lump sum from your funds - once you reach retirement age, while the rest gets taxed once you start receiving your retirement income. Unless you decide to withdraw the remaining 75%, but it will be taxed.

It is very common for people to withdraw this 25% and then purchase an annuity with the rest of the money. An annuity is a financial product that you buy and it secures an income for a certain term or for a lifetime.

When can I withdraw my pension?

Unlike the State Pension, which you can receive after 65 years old (depending on your date of birth), you can receive this one after 55 as of 2021 (but after 57 from 2028).

A good option is to defer - or delay - your pension once you reach retirement age, and keep on growing your pension fund until you want to stop working and retire.

A stakeholder pension is uncomplicated as long as you stick to the Government’s rules and regulations. It is flexible for many, and it ensures that most have an income when they retire.

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