Stakeholder pensions are a type of personal pension. They have to meet certain government standards to ensure they’re flexible and have a limit on annual management charges. The minimum payments are also low and you can stop and re-start payments whenever you wish.

Stakeholder pensions work in much the same way as other money purchase pensions. You pay money into your pension to build your pension fund. The managers of the stakeholder pension scheme invest the pension fund on your behalf.

The value of your pension fund will be based on how much you have contributed and how well the fund’s investments have performed. You can also stop payments for a while if you need to without it costing you anything.
When you retire, you use the fund you’ve built up to buy an annuity (a regular income payable for life) from a life insurance company of your choice. Most people choose to wait until they are 60 or 65 until drawing on their stakeholder pension. However, if you wish you can draw on these benefits while still working.

By law stakeholder pensions must meet a number of minimum standards to make sure they offer value for money, flexibility and security. The standards include:

Limit on annual management charges

– managers can charge fees of up to one and a half per cent of your pension fund each year for the first 10 years you hold the product, and thereafter up to one per cent
Flexibility

– you can switch to a different pension provider without the provider you leave charging you

– you can start contributions from as little as £20, and pay weekly, monthly or at less regular intervals

– you can stop, re-start or change your payments whenever you want – there are no penalty fees

Security
– the scheme must be run by trustees or by an authorised stakeholder manager, whose responsibility will be to make sure that the scheme meets the various legal requirements

You can now save as much as you like into any number and type of pensions, including stakeholder pensions. You receive tax relief on contributions of up to 100 per cent of your earnings each year, subject to an ’annual allowance’ (£245,000 for the 2009/10 tax year and £255,000 for the 2010/11 tax year). Savings above the annual allowance will be subject to a tax charge.

If you don’t pay tax, you can still receive tax relief on your (or someone else’s) contributions up to a certain limit.

Under changes announced in the 2009 Budget, from April 2011 the amount of tax relief will reduce if your income is £150,000 or more. Restrictions were introduced from 22 April 2009 to stop people making large additional pension contributions and receiving full tax relief ahead of April 2011.