Stakeholder pensions

Stakeholder pensions are a type of individual pension. Some employers offer them, but you can also start one yourself. 

Stakeholder pension features

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Stakeholder pensions have:

  • low and flexible minimum contributions
  • capped charges
  • a default investment strategy, which can be helpful if you don’t want to make investment decisions.

Other types of individual pension you might want to consider are:

  • Personal pensions
  • Self-invested personal pensions (SIPPs).

How stakeholder pensions work

Minimum standards

Stakeholder pensions must meet minimum standards set by the government.

These include:

  • a legal limit on charges – 1.5% a year of the value of your pension pot in the first ten years, then 1% a year. (But if an employer is using a stakeholder pension to meet their automatic enrolment duties these are subject to a charge cap of 0.75%)
  • charge-free transfers
  • being able to stop or re-start contributions at any time, without penalty
  • low minimum contributions of no more than £20
  • a default investment fund – your money will be invested into this if you don’t want to choose.

Tax relief on contributions

Your pension provider will claim tax relief at the basic rate and add it to your pension pot. 

If you’re a higher rate taxpayer, you’ll need to claim the additional relief through your tax return. 

It can help to think of pensions as having two stages.

Stage one – while you’re working

Your contributions are usually invested in stocks and shares, along with other investments. The aim is to grow the fund over the years before you retire.

You can usually choose from a range of funds to invest in.

Be aware though that the value of investments might go up or down.

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Many default investment funds feature ‘lifestyling’. Lifestyling is when your funds are moved – normally automatically - into lower risk investments as you approach retirement. The aim is to make sure you don’t lose money.

If in doubt, speak to a regulated financial adviser who can advise you whether lifestyling is something you want to consider or not, given your personal circumstances.

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Stage two – when you retire

When you retire, the size of your pension pot will depend on: 

  • how long you save for 
  • how much you pay into your pension pot 
  • how well your investments have performed 
  • how much, if anything, your employer pays in 
  • what charges have been taken out of your pot by your pension provider. 

You don’t have to stop work to take money from your stakeholder pension. But you must usually be at least aged 55 (57 from 2028).

When you do start to take money, up to 25% of the pension pot you have built up can be withdrawn as a one-off tax-free lump sum. The balance can be used to provide a taxable income and/or one or more taxable lump sums.

It’s important to understand your options.

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Setting up a stakeholder pension

If your employer offers you a stakeholder pension, they will have chosen the pension provider. They might also arrange for contributions to be paid from your wages or salary.

Your employer might contribute to the scheme.

If they’re using the stakeholder pension to meet their automatic enrolment duties, they must contribute.

You can also set up a stakeholder pension for yourself.

Changing jobs

If you change jobs, check when your new employer will enrol you into a workplace pension scheme. 

You can continue paying into an existing stakeholder pension. But you might find you’ll be better off joining your employer’s workplace pension scheme – especially if your employer contributes. 

Compare the benefits available through your employer’s scheme with your stakeholder pension. 

If you decide to stop paying into a stakeholder pension, you can leave the pension pot to carry on growing. There shouldn’t be extra charges for doing this. 

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MoneyHelper is the new, easy way to get clear, free,
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Looking for us? Now, we’re MoneyHelper

MoneyHelper is the new, easy way to get clear, free,
impartial help for all your money and pension choices.
Whatever your circumstances or plans, move forward with MoneyHelper.

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