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Placing a stake for retirement By James Watson
Stakeholders are often not viewed as the most exciting option in the pensions world, but they are a sturdy and efficient way to save for retirement and more of us should be taking advantage of them. And the earlier you start contributing So, what are stakeholder pensions and how do they work? Stakeholders were introduced by the Government in 2001 as a low-cost, tax-efficient way to save for retirement. They must meet minimum standards laid down by the Government regarding charges, flexibility and the regular information customers must be given. Stakeholders are the cheapest way to save for retirement because providers can only charge one fee, known as an annual management charge, which is capped at 1.5% for the first 10 years and 1% thereafter. While other personal pension charges have dropped to compete with stakeholders, they are normally more expensive. A SIPP (self-invested personal pension) for example, will charge an annual management fee of between 0.5% and 1.5% and the underlying fund will charge up to a 5.5% initial charge and another, smaller, annual management charge. Personal pensions may also charge for transfers out or amendments to your fund holding. Increased flexibility The flexibility of stakeholders allows you to stop, start or change your contributions, and make weekly, monthly or one-off payments. You can save as much as you like into a stakeholder pension, although tax-relief only applies to contributions of up to 100% of your salary, subject to an 'annual allowance' of £225,000. Stakeholder pensions schemes must accept contributions from as little as £20, and some will accept even lower payments. The real bonus of stakeholder pensions, as with other personal pensions, is their tax efficiency. Basic rate taxpayers pay contributions net of 22% income tax, which means it costs just £78 to invest £100, and the Government automatically tops up £22 in the form of tax relief. The same goes for higher rate taxpayers who pay 40% income tax, but the extra £18 for every £100 invested must be claimed back through filing your annual tax return The low cost nature of stakeholders however mean some restrictions apply. Providers often limit the funds they offer to their own range, and generally the range of funds available is not as wide as with other types of personal pension - although some do offer a choice of 40 or more. "Stakeholders are a great savings vehicle for those just starting to make pension contributions and people who want a low cost and straightforward product," explains Matt Pitcher, a wealth advisor at Towry Law in Bracknell. "They are also the best option for those who are not likely to hold a pension pot of more than £100,000 at retirement." For higher earners with more money to invest and a sizeable existing pension fund, a SIPP is often a better option. SIPPs are more expensive and require more input from the investor, but offer a much larger range of investment options to create a more diverse portfolio. "SIPPs are better for those wishing to make larger contributions or who wish to consolidate a range of investments in one place," said Pitcher. High rate demand As with all pensions, upon retirement you can opt to take 25% of your stakeholder pension pot as a tax-free lump sum and the remainder can be used to provide a steady lifetime income, subject to income tax. Stakeholder pensions are available to anyone under 75-years-old who is a resident in the UK, including employees, the self-employed, non-earners, such as housewives, and even children. The big plus for non-earners is that contributions of £3,600 a year can be made and still receive tax relief, explains Pitcher. "Much of the demand for stakeholder schemes comes from higher rate taxpayers who wish to save for their children, grandchildren or spouse, or who have spare cash that they wish to invest," he says. In these cases, contributions don't count in your personal annual pension limit, but that of the person you are investing for. " For higher rate taxpayers the mainstream personal pension product is the SIPP, with the stakeholder being popular for these fringe reasons," adds Pitcher. Like all personal pensions, your stakeholder scheme will grow free of UK capital gains tax and income tax, and if you die before you retire your pension is payable to your chosen beneficiaries free of inheritance tax. The general consensus among independent financial advisers is that is you don't currently have a pension, stakeholders are a good option to get started. When deciding how much to invest, Philip Pearson, partner at P&P Invest in Southampton, advises thinking about how much income you will need in retirement, then work backwards to see how much you need to contribute each month to achieve this. "But just start funding a pension now," says Pearson. "Starting any contributions is better than doing nothing, then revisit your pension annually to review your investments."
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