FOOL SCHOOL
Stakeholder Pensions

September 17, 2003

If you've ever tried to get to grips with understanding pensions, it won't surprise you to learn that many of us consider them so complicated that we delay getting one, or don't bother at all. And because pensions are often very expensive, that means the pot at the end is not as big as it might have been. Stakeholder pensions were therefore introduced in 2001 to try to address three main problems:

• we don't understand pensions
• we don't save enough for our old age
• even where we do save, we often get ripped off in the process

Ultimately, the stakeholder pension is a comparatively simple form of personal pension which has to meet the standards of what the Government thinks is fair value for money. It's a bit like the CAT standard that has been introduced for certain ISAs and mortgages, which limits the charges and conditions attached to any CAT-marked financial product.

The idea is that, while a stakeholder pension may not necessarily be the cheapest personal pension on the market at any given time, it should be a flexible product of reasonable value that is easily understood by the consumer. Pension managers are can only charge fees of up to 1% of your pension fund per year. There can be no up-front charges. You can stop and start your payments whenever you like over the years and you can make payments from as little as £20. You can take your stakeholder pension with you if you change your job, and you can switch it to a different provider whenever you want without penalty.

All this is good news. To quote from a report from the Financial Services Authority on the subject, stakeholder pensions "provide a signpost to a safe haven product" and that's probably a fair description.

Employers that have five employees or more, and that don't have an existing company scheme you can join, are required to offer a stakeholder pension. If you prefer, you can just go and get your own stakeholder pension. (A full list of stakeholder providers is provided on the Opra web site.) You can even contribute to someone else's stakeholder. Some parents have done this, putting the Child Benefit they receive into a stakeholder pension. (You can read more about this in this article.) 

However, the initial takeup of stakeholder pensions has been disappointing with many pension companies claiming that the 1% expenses cap does not make it worthwhile for them to market the product. It's somewhat of a Catch-22 situation as the sort of investors at whom stakeholder pensions are targeted are those who can least afford to pay higher charges.

Find out more in our pension centre.