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Retirement
Guide to Stakeholder Pensions
What is a Stakeholder Pension?
How much can I contribute?
If I don’t pay the maximum amounts can I pay the
balance later?
Do I get Tax Relief on my Pension Contributions?
Do I qualify for extra tax relief if I pay Higher
Rate Income Tax?
Can my employer make contributions on my behalf?
I want to make contributions to another Pension as
well as my Stakeholder Pension.
When can benefits be taken from a Stakeholder
Pension?
Must I take my Stakeholder benefits as a pension?
What if I die before I draw my benefits?
Which Stakeholder Pension will be best for me?
What do I need to think about when selecting a
Stakeholder Pension?
What is a Stakeholder Pension?
Stakeholder Pensions are a form of Personal Pension where
certain conditions, laid down by the Government, must apply. These
conditions relate to the maximum amount that the Pension Company
may charge for the product, the minimum level of contribution they
must accept and the abolition of a fixed frequency for your
contributions.
When the idea was first introduced it was thought that
Stakeholder Pensions would be targeted at individuals earning
between £9,000 and £18,000 per year. However as they have evolved
it has become clear that they are equally suitable for people who
earn more than £18,000. Under new rules introduced at the same
time as Stakeholder Pensions you will be allowed to make a
contribution to a Stakeholder Pension even though you are not
working or receiving any income.
The amount you can contribute to a stakeholder pension depends
on your income, but regardless of these factors you will be
allowed to save at least £3,600 gross a year (£300 per month)
towards your retirement.
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How much can I contribute?
Although there are limits on contributions to Stakeholder and
Personal Pensions these limits are very generous. You will be
allowed to contribute up to £3,600 per year (£300 per month)
without any reference to your income or your age.
If you wish to pay more than £3,600 this may be allowed but
this does depend upon the amount of your earnings.
The maximum that can be paid into a Pension Plan, including
Stakeholder Plans, is capped at 100% of your salary. The Government reviews this cap
annually.
The Government has simplified the tax rules for pensions since April 2006.
You can contribute as much of
your taxable earnings to your pension as you want - up to a
maximum limit set and still
benefit from tax relief. This is currently £235,000 and this
limit has recently been frozen.
There will also be an overall “lifetime allowance” on the total
amount of money you can save in your pension and still benefit
from tax relief.
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If I don’t pay the maximum amounts can I pay
the balance later?
This is no longer allowed. Before the 5th April 2001 there were
rules that would allow you to ‘carry forward’ any scope for
pension contributions that you had not fully used in any tax year.
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Do I get Tax Relief on my Pension
Contributions?
The Government allows Income Tax relief on most pension
contributions. In the case of Stakeholder Pensions any
contributions you make are entitled to immediate Income Tax relief
at a rate of 20%.
For example, if you contribute £80 each month then the Pension
Company will be allowed to reclaim from the Government £20 of tax
relief on your behalf. This tax relief is added to your plan
alongside the payments you, and if appropriate, your employer
elect to make. This means the actual amount invested in your
Stakeholder Pension plan would be £100 per month.
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Do I qualify for extra tax relief if I pay
Higher Rate Income Tax?
Yes, at present the Inland Revenue will allow Higher Rate Tax
payers who make pension contributions to claim up to 40% tax
relief. As only 20% is granted at source you must claim the
balance from the Inland Revenue. Your Pension Company or Tax
Office will provide you with the required form to claim this extra
tax relief.
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Can my employer make contributions on my
behalf?
Employers may pay money into your Stakeholder pension plan
alongside any contributions that you make yourself. The normal
contribution limits continue to apply. This means that if the
total contributions exceed £3,600 per tax year the amount actually
paid must be justified by reference to your age and earnings.
There is no obligation on any employer to contribute to a
Stakeholder Pension plan. However, many chose to do so as part of
the overall benefits package they provide for their staff.
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I want to make contributions to another
Pension as well as my Stakeholder Pension.
This is an area of confusion for many people. As part of the
changes made in April 2006, it is now possible for you to make
contributions to two different types of pension arrangement at the
same time, within the limits given above.
If you need assistance to understand your situation in the
light of the new rules, please contact us.
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When can benefits be taken from a Stakeholder
Pension?
Under normal circumstances which assume that you are in good
health, you can take your benefits at any time from age 55 to 75.
This applies whether you are male or female. You do not need to
stop working or reach state retirement age to be able to draw
benefits from your Stakeholder Plan.
If your health is poor and you are classified as unable to
work, then you may be able to draw benefits before age 55 (please note: there are strict rules
regarding ill health early retirement. If you believe you could
qualify for such early retirement you should seek advice from your
pension provider).
There are some occupations where the Inland Revenue have agreed
special retirement ages. These lower ages allow members of that
profession to draw benefits earlier than age 55 regardless of their state of health. Examples of such
lower ages are Professional Footballers, Deep Sea Divers and
members of the Reserve Forces.
You must draw your Stakeholder Pension benefits on or before
your 75th Birthday.
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Must I take my Stakeholder benefits as a
pension?
At the time you choose to draw your benefits you can choose to
take up to one quarter of the value of the pension fund as a lump
sum. Currently these lump sum payments are tax-free.
The balance of the fund has to be taken as a pension, although
that does not necessarily mean you must immediately buy an
annuity. For further details of your options at retirement you may
wish to talk to an adviser. You can contact us by clicking on the
button marked ‘Make contact now’ shown on the right.
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What if I die before I draw my benefits?
The value of your Stakeholder Pension fund is normally returned
to your next of kin tax free if you die before you draw your pension. It is
likely that the payment will be free of any Inheritance Tax.
However, this can not be guaranteed. You can give an indication of
those people you would prefer actually received the benefit were
you to die, either by placing your Stakeholder Pension plan in
Trust or alternatively by completing a ‘Nomination’ form.
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Which Stakeholder Pension will be best for
me?
Stakeholder Pension plans offered by the many different Pension
Companies all have to apply the same rules about contributions,
benefit structures and maximum charges. However the amount that
they charge, within the maximum charge of 1.5% per annum and the
choice of investment funds available is a matter for each of them
to decide upon.
It is important to have an understanding of risk when selecting
your investment funds. With so many different schemes to choose
from, we suggest that you seek advice before deciding the best
pension for you. If you need assistance then you can contact us.
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What do I need to think about when selecting
a Stakeholder Pension?
Check if your employer is setting up a stakeholder pension and,
if so, which Pension Company is responsible for running that
arrangement. It may be that this scheme might be suitable for your
needs.
If you already have a personal pension or are part of an
occupational pension scheme, check how much you or your employer
will be allowed to contribute to a new Stakeholder pension plan.
It is likely that you will wish to know how your contributions
are to be invested, All Stakeholder Pension Plans offer a default
investment fund but many offer a choice of funds where your money
can be invested. If your Pension Company does offer an investment
choice you should check that there are no extra charges for
investing in a fund that is not the default investment fund. |
