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Wednesday, 12 February, 2003, 19:00 GMT
What are stakeholder pensions?
The government launched the long-awaited stakeholder pension in April 2001, aimed at helping more people provide better for their retirement. But what are stakeholder pensions exactly and who should be thinking of getting one? BBC News Online provides the answers.

What is a stakeholder pension?

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.

What happens to the money I pay into one?

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.

How are stakeholder pensions different from other pensions?

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.

Should I get one?

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.

What if I'm a high earner?

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.

What if I'm self-employed?

You can build up entitlement to the basic state pension but you will not get any additional state pension (either from Serps or the planned State Second Pension).

If you have no other provision for your retirement beyond the basic state pension, you might find a stakeholder scheme attractive.

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.

What if I'm not currently working?

Some people not currently working, such as those caring for children, have their basic state pension protected but are not building up their entitlement to Serps.

Those who are not working because they are looking after children or disabled people or have a long-term disability or illness themselves will qualify for the State Second Pension due to be introduced in 2002.

However, those who can afford to contribute to a pension might want to consider a stakeholder scheme and would benefit from the tax-free nature of gains in the fund's value.

What if I'm paying AVCs to a company scheme?

There is no need to stop any additional voluntary contributions (AVCs) you may be paying to an employers scheme.

But the government's pensions advisory service says "you may wish to consider whether it would be advantageous to start paying contributions to a stakeholder pension instead of, or in addition to, your current AVCs if you are eligible to do so".

One advantage of a stakeholder is that you can take 25% of your final fund value as a tax-free lump sum whereas AVC schemes (started after 8 April 1987) only allow you to take the proceeds as a pension.

You might also find that the stakeholder's upper limit of 3,600 allows you to contribute more than you can with AVCs.

However, these benefits might be outweighed by costs or penalties involved in stopping AVCs.

If you are in a company scheme, you can only take out a stakeholder pension if you earn less than 30,000 a year and are not a controlling director.

What if I have a personal pension already?

If your contributions do not exceed the stakeholder pension's maximum, it might be advantageous to pay up your personal pension or transfer it to a stakeholder scheme.

However, any benefits would have to be weighed against any charges or penalties involved in paying up or transferring your existing personal scheme.

In addition, if your personal pension is performing particularly well, it might make good sense to keep it going rather than start another scheme that will follow a slightly different investment strategy.

If in doubt, consult an independent financial adviser.

How much can I pay in to a stakeholder scheme?

You can invest up to 3,600, or a set percentage of your earnings depending on your age, in a stakeholder pension each year.

This figure includes your own contributions, any contributions your employer may make and the tax relief you receive from the Inland Revenue.

It does not include the National Insurance rebate you will receive if you opt out of Serps or the planned State Second Pension.

Where can I get a stakeholder pension?

Stakeholder pensions will be marketed by banks, insurance companies and building societies - broadly speaking, it will be the familiar High Street names that already offer other savings, investment and insurance products.

Some other organisations such as trade unions may also offer stakeholder pensions to their members.

When can I get one?

They were launched on 6 April 2001.

Companies were obliged to provide their workers with access to a stakeholder pension scheme by 8 October 2001 unless they have fewer than five employees or offer their own pension scheme which all employees may join within one year of starting work.

Employers contributing at least 3% of employees' earnings into a group personal pension for workers would also be exempt from having to provide access to a stakeholder scheme as long as there were no penalties for employees leaving the group scheme.

Can I have more than one?

Yes, you can have as many stakeholder pension plans as you like but bear in mind the upper limit on contributions applies to your total contributions rather than contributions per plan.

This information is based on the government's own advice. If you have any further questions about stakeholder pensions, you should follow the web links listed at the side of this page, call the Pensions Advisory Service on 0845 6012923, or consult a qualified financial adviser.

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