FOOL'S EYE VIEW
60-Second Guide To Stakeholder Pensions

By James Carlisle
August 30, 2002

Stakeholder pensions are a breath of fresh air in the world of pensions, being both cheap and flexible.

0:57 What are 'Stakeholder' pensions?

Stakeholder pensions are a type of personal pension. These are mostly designed for people that don't get a pension through work. However, you might still be able to pay into one even if you do have a company pension. Personal pensions are 'defined contribution'. That means that you pay money into them, the Government chips in the income tax you've had to pay on that money, it all gets invested until you retire and then you get 25% in the form of tax-free cash and use the other 75% to buy an annuity.

0:46 Who can contribute?

It used to be that you had to have 'earnings' (from employment or self-employment) to contribute to a personal pension, but the rules have recently been changed so that anyone can set one up -- even if they don't work and even if they're under-18 (you can even set one up for a baby). In an uncharacteristic display of generosity, the Government will even chip in the equivalent of basic rate income tax - even if you're not working and didn't pay any.

As a basic rule, you can't contribute to a personal (eg stakeholder) pension if you have a company pension, but there are some big exceptions to this. If you're a UK resident, haven't been a company director in the last five years and have earned less than £30,000 in one of the last five years, then the chances are you can contribute to a personal pension.

0:33 How much can you contribute?

If you're allowed to have a personal pension, then you'll be allowed to pay £2,808 into it (and the Government will then make this up to £3,600). Beyond this, it depends on how old you are and how much you're earning. If you're 35 or below, you can contribute up to 17.5% of your earnings, but this gradually increases to 40% of your earnings when you're over 60.

0:23 So what's so special about Stakeholder Pensions?

As we've said, stakeholders are a form of personal pension, but to earn the "Stakeholder" tag, they have to comply with certain Government guidelines, to do with...

0:18 ...being cheap...

A stakeholder pension isn't allowed to charge more than 1% of your pension fund in fees each year. A few other costs that can be charged (for example the costs of buying and selling investments or of splitting the pension fund in the case of divorce), but there can't be any up front charges.

In practice, this doesn't leave the pension companies with enough money to pay their expensive fund managers, so Stakeholder pensions tend to be built around index trackers. That, however, has to be seen as a good thing, since index trackers tend to beat other types of fund (mainly because of their lower charges).

0:06 ...and being flexible

A stakeholder must let you make contributions of as little as £20, weekly, monthly or as one-off contributions. You must also be able to move the accumulated pension fund to another provider free of charge.

Got a few minutes more?

Sadly you'd need a few days more to get all the way to the bottom of the absurdly convoluted world of pensions. But you can make a good start in just an hour or so by checking out the Fool's Pension Centre.