Introduced by the British Government in 2001, stakeholder pensions are a type of employee pension scheme that offers generous tax breaks and flexible terms. However, they are not without their drawbacks, particularly when compared to final salary pension schemes. In this article, we take a close look at stakeholder pensions, in order to help you decide whether or not they are the best option for you.

A stakeholder pension is a type of money purchase pension scheme, with tax breaks, that was introduced by the UK government in 2001. Money purchase, also known as ‘defined contribution’ pension schemes are a type of employee pension where employees pay money on a regular basis into a retirement fund, which is invested in the stock market. Upon retiring, the retirement fund is used to purchase an annuity, which will provide the person with an income for the rest of their life. The size of the stakeholder pension is dependent on how well the retirement fund performs, and also on the annuity rates that are available when the person retires. This means that the employer does not have to guarantee to pay out a certain amount when an employee retires with a stakeholder pension, as they would have to with a final salary pension scheme.

If your retirement happens to coincide with a rising stock market, then you can expect a decent return from your stakeholder pension. However, if the stock market is in a slump when you retire, your stakeholder pension will probably pay out a lot less than you expected. Another problem with stakeholder pensions, and other money purchase schemes, is that employers usually contribute more towards final salary schemes than they do into stakeholder pensions. On average, employers contribute around six percent of salaries into stakeholder pension schemes, as opposed to an average of 11% for final salary schemes. So, don’t expect a stakeholder pension to provide you with a comfortable retirement on its own.

In order to be classed as a stakeholder pension, a money purchase pension has to have a default investment fund (a fund that your money will automatically be put into unless you choose otherwise), penalty-free transfers, flexible contributions, limited charges, and low minimum contributions. Stakeholder pensions are usually offered by employers, but you can start one yourself if you want to. If you are offered one by your employer, then they will have picked the pension provider and will have made arrangements for contributions to be taken automatically from your wages. They may also contribute to the scheme out of their own pocket. One of the major benefits of stakeholder pensions is that they are eligible for tax relief. If you are a basic rate taxpayer, the pension provide will claim tax relief on your behalf, and add it to your fund. However, if you are paying a higher rate of tax, then you will need to claim the rebate when you fill in your tax return.

The amount of money that you receive from a stakeholder pension depends on a number of factors, including how much you pay into your stakeholder pension, how much your employer pays in to your stakeholder pension, the performance of the investments contained within your stakeholder pension, the charges that have been taken out of your stakeholder pension fund by the pension provider, the amount that you take as a tax-free lump sum upon retirement, the type of annuity that you choose, and the annuity rates at the time you retire.