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How stakeholder pensions work

Stakeholder pensions work in much the same way as other money purchase pensions. You pay money into your pension to build your pension fund.

The managers of the stakeholder pension scheme invest the pension fund on your behalf. The value of your pension fund will be based on how much you have contributed and how well the fund's investments have performed. It is best to make regular contribution payments if you can. But you can stop payments for a while if you need to without it costing you anything. However, that will mean you have a smaller pension fund unless you make extra payments later.

When you reach the age when the stakeholder pension can be paid, you can use the fund you have built up to buy an annuity. This is a regular income, payable for life, which you can buy from a life insurance company of your choice. Most people choose to wait until they are 60 or 65 until drawing on their stakeholder pension. However, if you wish you can draw on these benefits while still working.

How stakeholder pensions differ from other personal pensions

By law stakeholder pensions must meet a number of minimum standards to make sure they offer value for money, flexibility and security. The standards include:

Limit on annual management charges:

• managers can charge fees of up to one and a half per cent of your pension fund each year for the first ten years you hold the product, and thereafter up to one per cent

Flexibility:

• you can switch to a different pension provider without the provider you leave charging you
• you can start contributions from as little as £20, and pay weekly, monthly or at less regular intervals
• you can stop, re-start or change your contributions whenever you want – there are no penalty fees

Security:

• the scheme must be run by trustees or by an authorised stakeholder manager, whose responsibility will be to make sure that the scheme meets the various legal requirements

Contribution levels and tax relief

You can save as much as you like into any number and type of pensions, including stakeholder pensions. You get tax relief on contributions of up to 100 per cent of your earnings each year. This is subject to an 'annual allowance' which is £50,000 for the 2012-13 tax year.

For example, if you pay tax at 20 per cent, for every £80 you pay into your pension, you get £100 in your pension pot. If you pay tax at the 40 per cent or 50 per cent rate you can claim the extra tax back. Savings above the annual allowance will be subject to a tax charge. Find out more by following the link to 'Pension rules from April 2006' below.

If you don't pay tax, you can still get tax relief on your (or someone else's) contributions up to a certain limit.

• Pension rules from April 2006

• Tax relief on pension contributions

• Annual allowance changes on the HMRC website Opens new window

Is a stakeholder pension right for you?

A stakeholder pension could be a good pension to consider if:

If you're an employee you can opt out of the additional State Pension. Instead you can put the National Insurance payments which would have gone towards it into a personal pension, including a stakeholder pension. This is known as 'contracting out'.

From 6 April 2023 you will no longer be able to contract out of the additional State Pension through a stakeholder pension. If you contracted out into a stakeholder pension before 6 April 2012, you will start building entitlement to the additional State Pension from this time.

• Use the Money Advice Service stakeholder pensions decision trees Opens new window

Getting financial advice

If you aren't sure if a stakeholder pension is right for you, seek expert advice from a financial adviser before making a decision. You may need to pay for this. Advisers must tell you whether they recommend from just one company's products, from a limited range of providers or the whole market.

• Choosing and using a pensions adviser

Where you can get a stakeholder pension

You get a stakeholder pension from financial services companies such as insurance companies, banks, investment companies and building societies. Other organisations such as trade unions may also offer stakeholder pensions to their members.

The Pensions Advisory Service helpline

The Pensions Advisory Service helpline deals with general enquiries about personal pensions, including stakeholder pensions, and occupational pensions. It is open Monday to Friday from 9.00 am to 5.00 pm on 0845 601 2923.

• Contact The Pensions Advisory Service

More useful links

• Managing money (money, tax and benefits section)

Useful contacts

• Money, tax and benefits contacts