A stakeholder pension scheme is a defined contribution scheme that provides a personal pension plan for those that do not have one from their employer, are self-employed, or would just like an additional personal pension.
The key factor with a stakeholder pension is that the Government has outlines criteria which it must meet. this is unique in that most other personal pension plans have their fess and conditions determined by the provider. The conditions a stakeholder plan must meet include :
- Membership must be available to all employees with a particular employer. It cannot be restricted to certain classes or employees
- Annual management charges must not be more than 1.5% per year for the first ten years of scheme membership and then not more than 1% thereafter
- The minimum gross contribution payable to the scheme must not be set at a level higher than £20, whether the contribution is paid on a regular, or, a one-off basis
- Contributions must be accepted if they are made from a bank account or building society account by way of cheque, direct debit, standing order or direct credit. The provider may also decide to accept other payment methods
- Contributions may be stopped or restarted at any time, without penalty
- Members must be provided with a default fund for investment if they do not want to make investment choices themselves
- Other investment choices offered must meet diversification and suitability criteria
- A ‘lifestyling’ investment option must be available. Lifestyling involves the gradual transfer from higher risk investments to lower risk investments as a member approaches their selected retirement date. Lifestyling must commence at least 5 years before the member’s selected retirement date. It’s designed to shield the member’s accumulated fund from investment volatility in the period leading up to the member’s selected retirement date
- Transfers in from other UK schemes must be accepted without additional charges (including contracted-out benefits)
- Normally when a transfer out is made to another scheme, there will not be a penalty. Penalties may apply if an individual is invested in a with-profits fund
- Members must be provided with a detailed statement each year.
The providers of stakeholder plans are normally life insurance companies or an investment platform. These days it is possible to fully manage and track a stakeholder pension plan online.
One of the key disadvantages of this type of plan, is fund choice. Due to the low cost nature of the wrapper, the investment choices are usually limited. For example an insurance company may only provide a limited number of their own investment funds. It is not possible to invest elsewhere.
For example, at the time of writing Standard Life offer around 37 different funds in which to invest. They are all Standard Life investment funds, and a maximum of 12 can be selected at any time. No other external investment is permitted within the scheme.