PENSIONS

Stakeholder Pension Schemes

A simple and accessible way to save for your future

Stakeholder Pension Schemes

A Stakeholder Pension (SHP) is a type of personal pension scheme set with minimum standards by the government. This makes it simple and accessible for many people saving for retirement. Like other personal pensions, they are open to any UK resident under the age of 75. A legal guardian can also establish a plan for someone under 16.

You can set up a Stakeholder Pension yourself by choosing a provider that suits your needs, often with the assistance of a financial adviser. It is possible to have an SHP alongside a workplace pension or use one as your main savings method if you are self-employed or not currently employed.

Contributions can be made by you, your employer, or other third parties. Your money is invested by the pension provider, usually in a variety of funds, to help it grow over time. As with any investment, the value of your pension pot can fluctuate both upwards and downwards.

Stakeholder Pensions must meet several government-set rules, which include:

Capped charges: Annual management charges are capped at 1.5% for the first 10 years and 1% thereafter. If an employer uses an SHP as its auto-enrolment scheme, the default fund charge is capped at 0.75%.
Low minimum contributions: You can start saving with as little as £20 a month, or make one-off payments.
Flexibility: You can pay in lump sums, stop and restart your contributions at any time without penalty, and switch to another provider for free.
Access age: You can start taking benefits from age 55, which will rise to 57 starting in April 2028. You do not have to stop working to do so.

Tax relief on contributions

Like other pensions, Stakeholder Pensions provide tax relief on your contributions. Basic-rate tax relief is added to your pension pot by your provider at source. If you are a higher or additional-rate taxpayer, you can claim the extra relief through your self-assessment tax return.

Contribution limits are the same as those for other personal pensions. You are subject to the Annual Allowance, which is the maximum you can save in a tax year before incurring a tax charge. You may also be able to carry forward unused allowance from previous years. If you have already begun drawing a flexible income from a pension, the lower Money Purchase Annual Allowance (MPAA) might apply.

Additional withdrawals

When you choose to access your pension, you can typically take up to 25% of the fund as a tax-free lump sum. Any additional withdrawals you make will be taxed as income at your marginal rate.

The key to any pension is to start contributing as early as possible and continue for as long as you can. This allows your fund to grow over time, with investment returns compounding throughout the years, potentially resulting in a larger sum for your retirement.

Nominated beneficiaries

How your pension is treated on death depends on your age. If you die before 75, your nominated beneficiaries can usually inherit the entire fund tax-free, either as a lump sum or by drawing an income. If you die after age 75, any withdrawals they make will be taxed at their own marginal rate of income tax.

In the Autumn Budget 2024, the Chancellor said that from April 2027, pensions will no longer be exempt from Inheritance Tax. That means that Inheritance Tax may have to be paid on your pension when you die.