Do Stakeholder Pensions Still Have a Place Today?
What do we know about stakeholder pensions? Well, they were introduced in 2001 as a consequence of the Welfare Reform and Pensions Act 1999. They were invented to encourage more long-term saving for retirement, especially among those on lower incomes.
The features of stakeholder pensions were intended to make them cheaper to sell than existing personal pensions and to provide a more transparent and attractive saving vehicle. They have to meet a number of conditions set out in legislation to include:
- a limit on charges;
- flexibility in relation to stopping and starting contributions; and
- low minimum contributions.
Furthermore, firms with five or more employees have to provide access to a stakeholder pension scheme unless a suitable alternative solution can be offered instead.
The standards include in more detail:
Flexibility: they have to be flexible in terms of being able to switch to a different pension provider without being penalised and the contributions can be as little as £20 a month, payable weekly, monthly or by ad-hoc lump sums. Plus, you should be allowed to stop, change and restart your contributions at any time without penalty.
Annual Management Charge Limits: there is a cap on this charge of one-and-a-half per cent each year for the first 10 years and, thereafter, up to one per cent.
Default Investment Fund: your money will be invested into this if you don't want to choose a particular investment fund for yourself.
Security Standards: such as independent trustees.
Who are they suitable for?
They are especially good for anyone with an irregular income, such as those who work part-time, the self-employed and people who take time off work to bring up children. They are also suitable for those who aren't working but can afford to pay in to a pension and for anyone who wants to save additional money for retirement on top of their workplace scheme. They are also good for people who see simple, transparent charges as a must-have.
What, then, can be considered their advantages? Mainly, they are good for inexperienced investors as they have to offer a default fund option consisting of mainly lower-to-medium risk investments, something which a personal pension does not have to provide.
They also cannot penalise individuals for choosing to stop their contributions or for transferring to another scheme, which could be useful for those who can't afford monthly contributions or who have inconsistent incomes. Furthermore, you get tax relief on your contributions, even if you don't pay income tax, and anyone can pay into your stakeholder plan. For example, parents or grandparents could save into a pension scheme for their children or grandchildren. This is a great way to ensure, for example, your child has some pension savings for when they reach retirement, or for workers to make payments for spouses who are at home with the children.
What are their downsides?
Conversely, their main disadvantages are a limited investment choice and, if you are a financial adviser, they do not operate on an advised basis and so cannot pay your fees if you recommend them to a client! As they are designed to be straightforward, they generally only include a few fund options, which are mainly on the lower-to-medium risk scale, meaning your potential returns are likely to be lower than that of other pension plans offering higher risk funds (although not necessarily in practice, of course). For an experienced investor who wants control over their finances and has an appetite for pragmatic risk taking, a more flexible scheme may be more appropriate.
It can be concluded that stakeholder pensions still have a place in today's pension market for anyone with an irregular income or who wants to make a low level or irregular contribution amount. If you are looking to invest in a stakeholder plan over another type of pension arrangement, look out for the ones that offer the lowest charges and also track a wide selection of funds, ideally with a good geographical spread. Whereas, if you are looking to choose the assets yourself and possibly want to invest in higher risk funds, then another pension option such as a personal pension or a self-invested personal pension plan might be more beneficial.