The Advantages of Stakeholder Pensions

You cannot open a stakeholder pension account if you have another pension account.

Stakeholder pensions were developed in the United Kingdom as another savings alternative for workers preparing their retirement. Stakeholder pensions have advantages over other savings products that encourage consistent saving over extended periods of time. Stakeholder pensions are governed by financial rules set forth by the U.K.

Contribution Flexibility

Stakeholder pensions typically require only a small contribution per month to keep the account open and active. Unlike other investment accounts or retirement plans, the minimum monthly contribution to a stakeholder pension is usually less than £50. The owner of the stakeholder pension can contribute as much as he wants each month provided that it is above the minimum amount.

Tax Incentives

Individuals with stakeholder pensions can take advantage of tax incentives offered by the government once the pension holder reaches the minimum withdrawal age. Once the owner of the stakeholder pension turns 50 years old, she can withdraw up to 25 percent of the account free of taxes. After the pension holder withdraws her 25 percent lump sum free of taxes, she pays reduced taxes on all other amounts she withdraws to live on.

Transferability

Owners of stakeholder pensions can transfer the pension between different financial institutions without penalty as many times as they need. Financial rules set by the government forbid financial institutions from charging customers who move their pension money fees for the transfer. The freedom to change financial institutions without penalty encourages individuals with stakeholder pensions to find financial institutions with reasonable management fees and other services.

Payroll Deductions

Many financial institutions offer payroll deduction services for individuals with stakeholder pensions. If the pension owner chooses, his financial institution can deduct a portion of his weekly or monthly payroll for stakeholder pension contributions. For instance, if the owner of the pension knows that he wants to contribute 5 percent of his pay each month to the pension, he can notify his financial institution so it can set up a withdrawal agreement with his employer.

Fee Restrictions

The yearly management fees applied to stakeholder pensions are restricted by law to encourage saving and discourage unfair business practices. At the time of publication, financial institutions can charge up to 1.5 percent of the pension total per year for management fees for the first 10 years. After the pension is open for 10 years, the financial institution can charge a maximum of 1 percent of the pension total per year for management fees for as long as the pension exists.

References

• Direct Gov: Stakeholder Pensions
• Barclays Wealth: Stakeholder Pensions
• Department for Work and Pensions: Stakeholder Pensions