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Stakeholder Pensions

Stakeholder Pensions
Published:  22 Feb at 7 PM
Stakeholder pensions are second pensions in addition to the basic state pension that everyone gets. The government introduced them because the basic state pension is unlikely to provide enough income for most people in their retirement.

They are intended as an alternative to personal pensions for those without access to company (occupational) pension schemes. Like other pension plans, the money paid into a stakeholder pension will be invested in items such as stocks and shares, bonds and cash savings accounts. While there is some degree of risk involved in investing in stock markets, stakeholder pensions are designed to be low-risk products, offering those without company pension schemes a higher income in retirement than they might otherwise have. Some schemes will offer holders a choice as to how their contributions are invested.

The government says stakeholder pensions will be simple to understand as well as being lower cost and more flexible than traditional personal pensions. Stakeholder pension providers will only be allowed to charge a maximum of 1% of the value of your pension fund each year for managing it (whereas many personal pension providers charge much more). They will not be allowed to penalise pension holders for transferring money in or out, stopping and starting contributions or for retiring early.

With a stakeholder scheme, individual contributions can be as little as £20, paid as irregularly as you like. There is also an upper limit on contributions.Stakeholder pensions are particularly aimed at those earning between £10,000 and £20,000 a year with no access to company schemes. However, the government says they might also be suitable if you earn less than £10,000 a year or have no income at all but can afford to contribute to a pension.

Unless they have substantial other funds, those earning less than £10,000 a year will probably be better off remaining in the state earnings-related pension scheme (SERPs). If you are thinking of taking out a stakeholder pension, you should remember that you will not have access to your contributions until you reach retirement age. If you think you might need some of your savings before then, other savings and investment products, such as individual savings accounts (ISAs) or unit trusts might be more appropriate.

If you remain in doubt, it might be a good idea to talk to a financial adviser. If you do, you might have to pay for any advice you receive. High earners will probably want to contribute more to a pension than a stakeholder scheme will allow. Many will also have access to company pension plans. These will almost certainly be preferable to stakeholder pensions.

Many financial advisers say the most important piece of advice is: Don't opt out of, or delay joining, a company pension scheme. This is because your employer will make contributions for you into a company scheme (sometimes you don't even have to make any contributions yourself) but will not pay into a stakeholder pension. Company schemes typically offer a range of other benefits as well that you will not get under a stakeholder scheme. You will benefit from tax relief on any contributions and charges are likely to be less than any you are paying on existing personal pension plans.

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