Stakeholder Pension Schemes – pros and cons

Most experts regard the state pension as insufficient to retire on and the majority of people seem to agree. According to a survey by Friends Provident, 75 per cent of 3,056 adults questioned think that the state pension is not sufficient to live on, while 36 per cent feel that they will struggle to make ends meet during their retirement.

Stakeholder pension schemes were introduced to provide a superior retirement income. As well as providing a 25% tax-free lump sum, this additional pension pot will greatly help to prevent retirement poverty.

Advantages of Stakeholder Pension Schemes

  • Portability. No charges are incurred for transferring a stakeholder pension to a new provider. This feature is vital due to the number of times employees now change jobs;
  • Lower management charges. New stakeholder pensions charge a maximum of a 1.5% management fee for the first 10 years and 1% thereafter. This is vastly more competitive than most pension schemes;
  • Tax breaks. Those paying into a stakeholder pension will receive tax relief on all contributions. Higher rate tax payers will receive tax relief at the 40% rate via self assessment;
  • Greater affordability. With minimum monthly contributions starting at £20, stakeholder pensions are vastly more accessible to the masses;
  • Matched personal contributions. Many companies will make a matching contribution into a stakeholder pension plan as part of a benefits package;
  • Accessibility. The self-employed and unemployed have access to a stakeholder pension scheme. Up to £3,600 can be paid in each tax year.

Disadvantages of Stakeholder Pension Schemes

  • Some companies don’t offer schemes. Whilst there is a requirement placed on companies to provide a stakeholder pension scheme, a number of companies are exempt from this provision. For example, smaller companies that employ less than 5 people;
  • False hope. People may think that paying the minimum £20 into a stakeholder pension will be sufficient to retirement fund, but it won’t. Talk to an Independent Financial Advisor (IFA) to work out how much needs to be contributed monthly to produce an adequate retirement income;
  • Pension rules. Current pension rules only permit 25% of a pension pot to be taken as a tax-free lump sum. Also, an annuity has to be purchased before the age of 75.

Depending upon only the state pension for a retirement income isn’t really a smart move. If not already in an occupational pension scheme, it is important to check with an employer to see how their stakeholder pension scheme works and whether they match personal contributions.

Those who found this article useful may be interested in reading about securing higher returns from a stocks and shares ISA or deciding whether a cash ISA or savings account is preferable. Finding out about level term life insurance is also vital for those with young families.

How to Save for Retirement & Build Pension Funds

Most people look forward to their retirement as a time when they can be free of financial commitments. This is a time when they can finally relax after years of working and bringing up a family and reap the rewards to which they are entitled. But, many fail to build up decent pension pots and find that this actually becomes a time of financial hardship. Thinking early about how to save for retirement may be useful. What options can be used?

What is the State Pension

In the UK the years that an individual works or the years that they are given credits for (i.e. when they give up work to look after their children) all come together to build a pension pot. This will make up the State Pension. The pension given will not necessarily be the same for every individual. Some may get the full State Pension; others may get a reduced amount or may not qualify at all.

Basically, the pension given is made up from the qualifying years when an individual worked. A year here is counted if the individual earned enough to make National Insurance payments or was given credits. The limits at the moment for the full State Pension are:

  • 44 years for men
  • 39 years for women

Those that retire after April 2010, however, will only need 30 years to qualify. Applying for a State Pension forecast may be useful as part of the retirement planning process.

What Other Pension Plans are Available

Few people want to solely rely on the State Pension and many will take different routes to boost their retirement income. Options include:

  • Company pensions offered by employers
  • Personal pensions taken out by the individual
  • Stakeholder pensions either given by employers or taken out by individuals
  • Tax free and standard investment vehicles and savings accounts

Many individuals will build up a variety of retirement savings and investment solutions, depending on their circumstances.

Things to Consider With Retirement Planning

The earlier an individual can save for retirement, the better in the majority of cases. Most pension plans are investment based so, all being well, they will show the best returns over time. This doesn’t mean that an individual should forget about their retirement if they have failed to make early plans, however. Making a retirement spending budget can help show how much money may be needed and whether action needs to be taken to boost income.

Those looking at fast-tracking retirement funds later in life may, for example, look at their tax free savings options if they are advised that a new pension may not work for them. Investments may not build up quickly enough to give a decent return at this stage so simply trying to build regular savings as much as possible may be worth doing. Taking independent advice from a pensions advisor or financial planner may help to work out the best options.

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