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The Stakeholder Pension |
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What are stakeholder pensions?
The stakeholder pension was introduced in 6 April 2001 to encourage those on lower pay and those with no earnings but money from other sources to save for their retirement. The pension was designed to be low cost and flexible. It works broadly like any other pension scheme - you make regular contributions and/or lump sum payments into a scheme and when you reach retirement age you use your pension fund to buy an annuity, which is use to provide a regular income in retirement. The flexible thing about the stakeholder is that it can be used on its own, as a top-up to company or private pensions as long as you do not exceed the pension contribution limits, and in addition to your entitlements to the state retirement pension. At retirement you could use your stakeholder plan in addition to the basic full state retirement pension, which is £77.45 a week for a single person and £123.80 for a married couple during 2003/2004. This is paid to people with a full national insurance contribution record at 65 for men and 60 for women. The state pension is increased each year by at least the rate of inflation. Some people who were in employment may also qualify for the State Second Pension, previously known as the State Earnings Related Pension Scheme, when they reach state pension age. This is a top-up to the basic state pension and it is aimed at helping those earning less than £10,000 a year. In October 2003 a new pensions credit regime will be introduced to encourage modest earners to save. The Department of Work & Pensions also plans to simplify the whole over-complicated pensions regime and the Inland Revenue is reviewing pensions taxation. Implementation of the changes decided upon is expected to begin in April 2004. In the first year of existence, 815,128 stakeholder plans were sold with about 322,359 sold through employers, according to figures from the Association of British Insurers. Why did we need another type of personal pension? The ageing population means that in the future the government pension scheme will be unable to give pensioners an adequate pension. The stakeholder pension is a private pension and not a state pension and it was introduced following a review of the state and private pensions schemes to encourage those on lower incomes of up to £20,000 and those with no earnings to save for their retirement. Where can I obtain a stakeholder pension? It can be bought by an individual through a bank, building society, insurance company, investment company or financial adviser. They are also being sold through companies with a workforce of at least five. By law, companies with a staff of five and more and no other occupational pension scheme are required to have an arrangement with a stakeholder provider to offer staff access to a stakeholder pension. However, companies are not required to contribute to the employee's stakeholder pension. How is the stakeholder different from personal pensions? The stakeholder was designed to be cheaper and more flexible than personal pensions. The principal feature is that there is a 1% limit on all annual charges. In general personal pensions tend to have higher charges. Contributions, starting from as little at £20 either regularly or irregularly, can be increased, decreased, stopped and re-started without penalty. In addition a stakeholder plan can be transferred to another provider without penalty. If you change jobs your stakeholder plan is portable and would move with you. The annual limit on stakeholder pensions is £3,600 gross a year including basic rate tax relief. If a basic rate tax payer (currently 22%), you would pay in £2,808. For the first time the stakeholder enables those without earnings, such as wives, carers, pensioners and students, to pay into a pension scheme. Who can take out a stakeholder pension? Most people aged between 18 and 75 can take out a stakeholder pension. You can take out a stakeholder pension if you are in an occupational scheme, earn less than £30,000 and have done so over the preceding five years, and if you have a personal pension but are not paying the maximum amount allowed into pensions. The exceptions are those in an occupational pension scheme who are controlling directors and those earning more than £30,000. Is there anyone who should not buy a stakeholder? Yes. If you are an employee and earn less than around £10,500 a year, it may be better to rely on the State Second Pension and the new pension credit due in October 2003. Also people near retirement age who could not possibly build enough funds in a scheme should not take out a stakeholder. If you don't think that you have enough years to save for retirement, you may be better off by not saving and relying on the state pension and benefits. You might be better off putting your money into a mini cash Individual Saving Account. The problem for some is that if they start saving they could find that they would lose out on means tested benefits. The new pensions credit regime is promising a a minimum of £102.10 for a single person and £155.80 for a married couple. Do I need a salary to contribute to a stakeholder? No. People without a salary and income from sources such as an inheritance, investment income, an annuity, state benefits, a student loan or even lottery winnings can take out a stakeholder pension. The rules also allow someone else to pay into a stakeholder plan for another person, for example, husbands for their wives and grandparents for their grandchildren. A parent or guardian or grandparent can set up a stakeholder and pay the contributions for any number of children under 18. At age 18 the child can start making their own contributions. If buying a stakeholder for someone else's child, you must tell the parents to ensure than the child only has one stakeholder pension in any one year. The rate of tax relief is set at the basic rate of 22% for those taking out stakeholder pensions on behalf of others. The child would get access to the funds when they are 50. The stakeholder is not suitable for paying school fees. How does the tax relief work? Contributions into a stakeholder plan will be payable net of basic tax for everyone, irrespective of whether you are employed, self employed or a non taxpayer. So if you are a non taxpayer and pay £2,808 net into a stakeholder, this will be topped up by the Inland Revenue with £792 (assuming basic rate tax of 22%) to make a gross contribution to your plan of £3,600. A higher rate tax payer wishing to make a gross contribution of £3,600, will pay a net contribution of £2,808 upfront and then apply for the 18% high rate tax relief of £648, either directly from their tax office or on their self assessment tax return. As well as tax relief on contributions, there is no income tax or capital gains tax on growth (apart from tax on dividends from UK companies). How does tax relief work for the self employed? Contributions made by the self employed are made net of tax. Are there any other rules that I should know about? Yes. Under stakeholder rules you can take your highest net relevant earnings level from any year in the previous five and pay into your personal pensions at this rate for the next five years, even if you are no longer working. For example, say you are aged 65 and your highest net relevant earnings in the five year period prior to retiring were £30,000 a year, you could continue making contributions into your personal and stakeholder pension of £12,000 a year (40% of £30,000) for another five years. Should I transfer my existing pension fund into a stakeholder? Whether you switch an existing personal pension into a stakeholder, depends on the penalties imposed by your existing provider. If you took out a personal pension in the last few years, you could find that you are still paying initial costs and could be penalised for closing the plan. However, if you have an older pension many of the charges would have been front-end loaded and often charges, especially on single premium pensions, may be low and it may be worth switching. You should get advice from an independent finance adviser before doing anything. You will have also to weigh up the cost of getting financial advice against the costs of moving and the benefits gained. Can I contribute to a stakeholder if I am in a company scheme? This depends on the type of occupational scheme you belong to. If you are in a defined contribution occupational scheme, and your employer has opted for the new defined contribution tax scheme, then you can have a stakeholder pension as well as your occupational scheme provided you and your employer's contributions do not exceed the maximum allowed under the Inland Revenue rules. If you are in a defined benefit scheme or a defined contribution scheme where your employer has not opted to join the new tax regime then to be eligible to fund a stakeholder you must not be a controlling director or be earning more than £30,000 a year in that employment. Further, as long as you were earning no more than £30,000 in at least one of the preceding five tax years, which cannot be earlier than 2000/2001, you can contribute to a stakeholder. Since 2001/2002 is the first tax year that you can contribute to a stakeholder, then it is earned income in 2000/2001 that must net the £30,000 rule. If you are eligible, this means that you can contribute up to 15% of your salary to your occupational scheme and AVCs each year, plus up to £2,808 (£3,600 gross) into a stakeholder. You should contact your employer scheme administrator or trustees if you are unsure about whether your scheme is 'old' or 'new' regime. Should I top up my company scheme with a stakeholder or an additional voluntary contributions (AVC's) plan? AVC's have been traditionally used as top up schemes for those in occupational schemes. Unlike the stakeholder, they do not offer tax free cash and require you to use the fund to buy an annuity. If you can afford to, you could contribute to your main company scheme and an AVC scheme (providing these schemes do not exceed 15% of your net salary) and up to £3,600 gross (£2,808 net) into a stakeholder pension. You could do this as long as you did not earn more than £30,000 a year and are not a controlling director. When can I take the benefits? You can choose to take the benefits from any age between 50 and 75. Up to 25% can be taken as a tax-free cash run and the rest is used to provide you with an income during your retirement. This can be done by buying an annuity from a life assurance company or drawing income out of your fund through a process known as income drawn-down. There are now a number of newer and more flexible annuity and income draw-down schemes and you must seek financial advice before making any decision about your retirement income. How are my stakeholder funds invested? Stakeholder pension plan providers will normally invest in about five to 10 different types of funds including tracker and actively management funds. Some providers allow you to choose the type of investment you want and will allow you to switch to another fund free of charge |