Over the years, personal pension plans, the main alternative for those without access to an occupational pension scheme, gained a reputation for being inflexible, expensive, difficult to understand and poor value for money, particularly for small savers.
In response, in April 2001 the government introduced a new scheme called the stakeholder pension, designed to be straightforward and offer good value for money, suitable for, and attractive to, a sceptical and cautious mass market.
It is basically a kind of personal pension; so you pay money into a pension pot run by an insurance company or bank, which is then invested in collective funds. What you get on retirement is therefore dependent purely on how much you put in and how well the investments performed.
Like other personal pensions, stakeholder pensions are open to almost anyone under the age of 75, and the amount you can put in each year is subject to the same complex rules and limits. The same tax rules also apply as for personal pensions*.
However, if a pension is to qualify as a stakeholder product, it must meet certain conditions, most significantly those to do with the costs of investment.
Charges
Management charges were originally set at a maximum 1% per year, and that cap remains if you set up a stakeholder pension before April 2005, as long as you remain in the same scheme. For stakeholder pensions taken out since April 2005 (which includes transfers from other stakeholder schemes) the cap has been raised to 1.5% per year for the first 10 years. After that the charge cap reduces to 1% per year.
That 1.5% charge should include the cost of information and basic advice, but if you want more detailed guidance you can expect to pay separately for it.
Accessibility
With a view to making stakeholder pensions available even to those with little spare cash, the minimum contribution for stakeholder pensions is set at £20, whether as a weekly, monthly or one-off payment.
Flexibility
There must be no penalty if you decide to stop paying into your scheme for a while, nor if you transfer from one scheme into another (whether or not it too is a stakeholder arrangement).
Simplicity
The pension provider must offer a ‘default’ option, often a tracker fund, which will be used if you do not want the responsibility of choosing your own investments from a wider range of funds that may be on offer. And you should receive a statement at least annually, explaining in simple terms how your investment is performing.
Personal vs Stakeholder
So, given that stakeholders are by definition reasonably cheap, easy to understand and flexible, why should anyone now looking to start a personal pension choose a non-stakeholder alternative?
The most obvious reason is that stakeholder schemes, because they are designed to be simple, middle-of-the-road products, tend to offer only a limited range of fairly conservative in-house funds. If you want to invest in racier alternatives, or seek a wider choice with access to other fund providers, you will need to look elsewhere. But external fund links and more exotic funds may involve an additional charge.
It is worth noting also that pension schemes have to meet all the specified criteria in order to count as stakeholders. When stakeholder was introduced in 2001, most major providers found themselves under pressure to bring their charges into line with the low charge cap, and indeed, as Robert Gaussen of broker Bestinvest points out, many comply with stakeholder rules in most respects. They may for example have low charges, flexibility and penalty-free transfers, but fail to meet one or two conditions such as the £20 ceiling on minimum contribution requirements.
Useful benchmark
Even if you opt in favour of a non-stakeholder plan, therefore, it is a useful exercise to assess it against the stakeholder conditions, using them as a benchmark for value for money and ease of access; you can then take a view on the non-stakeholder aspects of the plan and ensure you are happy with them.
Stakeholder plans may also be provided by employers for their employees, indeed, some employers are obliged by law to provide their staff with access to such a scheme, in the absence of any other. If you are not able to join an occupational scheme at work, have a look at the Employees’ Decision Tree provided by the government’s Stakeholder Helpline to see whether your company needs to take action.
Remember, finally, that the stakeholder label tells you nothing at all about the quality of investment or performance you can expect, only that the terms of the pension wrapper itself are fair.
Who will it suit?
If you have access to an occupational pension (or, failing that, a group personal pension to which your employer is contributing), it makes sense to join it in order to take advantage of the employer’s input.
But stakeholder pensions offer good value and fair terms for those who are not eligible to join their company’s occupational scheme, self employed people, or those who are not working, or anyone wanting to save for a child, provided they are happy to invest across a limited range of funds from a single provider.
A-Day changes
See article on personal pensions*
Books
A Girl’s Best Friend is her Money
Make Your Child a Millionaire – The Fool’s Guide
