What is a stakeholder pension & can I cash it in?

A stakeholder pension is a type of personal pension.

It’s a defined contribution pension, which means you pay money into a pot over time, and this money is invested in a range of assets such as stocks and shares.

The idea is that these assets will increase in value over time, and that this growth (along with your regular contributions) will boost the size of your pot over time.

You can then access this pot in a range of ways from the age of 55 onwards.

Keep reading to learn everything you need to know about stakeholder pensions.

What is a stakeholder pension and how does it work?

The terminology around personal pensions can be puzzling at first. There are three kinds of personal pensions, called stakeholder pensions, SIPPs, and just ‘personal pensions’. For clarity, we’ll call this third group ‘standard personal pensions’.

Stakeholder pension vs personal pension – the differences

Stakeholder pensions are pretty similar to standard personal pensions, though there are a few key differences:

• A stakeholder pension may have lower annual charges. These are limited to 1.5 per cent of pot size for the first 10 years, and 1 per cent after that.
• A stakeholder pension may allow a lower minimum contribution – as little as £20 a month.
• A stakeholder pension might invest in a narrower range of funds. This might result in lower growth (but not necessarily).

Stakeholder pension vs SIPP – the differences

A stakeholder pension is very different from a self-invested personal pension (SIPP). Specifically:

• A stakeholder pension invests in a fairly small range of funds, which are selected for you by the provider (though you may be given some choice). With a SIPP, you choose all the assets you invest in.
• A stakeholder pension is very simple to administer, so you’ll only need to check on it occasionally. A SIPP, on the other hand, will need regular attention from you.
• A stakeholder pension may have slightly higher management fees than a SIPP.
• A stakeholder pension might deliver lower growth, but might also expose you to less risk (depending on the assets held in a comparable SIPP).

Despite these differences, a stakeholder pension works broadly in the same way as any other defined contribution pension scheme. Stakeholder pension rules are the same as other personal pensions, in terms of how much you can contribute per year and in your lifetime, and how you will eventually access your pot.

If you need to, you can usually take a 'contribution holiday' from your stakeholder pension, temporarily suspending your pension contributions. This may be useful if your income fluctuates (e.g. if you are self-employed).

What is a group stakeholder pension?

Group stakeholder pensions used to be a common kind of workplace pension scheme, and some people still have them. If you are a member of a group stakeholder pension you can carry on contributing to it until you leave that employer.

Where can I find the best stakeholder pension providers? 

One of the main benefits of a stakeholder pension is the flexibility allowed when it comes to contributing and transferring pensions.

For that reason, stakeholder pensions must meet government standards that ensure low minimum contributions, free transfers of money between pensions, flexible contributions, and a default investment fund. So, to find the best stakeholder pension for you, you’ll need to shop around.  

Stakeholder pensions are particularly good for those who are self-employed or on a low income, so it’s a good idea to look for a pension provider that lets you contribute a smaller amount to your pension, allows you to freeze and re-activate your contributions when it suits, and offers you a wide range of choice about what your pension is invested into.

Also make sure to keep a close eye on any annual charges, although these are typically low.  

How do you set up a stakeholder pension?

Some workplaces will automatically offer you a stakeholder pension, in which case your employer will have already decided which pension provider to use.

Your employer may also arrange contributions to be made from your wage or salary. If your stakeholder pension is the only pension offered by your employer, you will be automatically enrolled and will have to opt out of paying your contributions if you don’t want to continue paying.  

You can also choose to set up a stakeholder pension as a personal pension for yourself, however it is worth remembering that any pension you set up has to meet government standards to ensure they are good value.  

Can you transfer a stakeholder pension?

Pension providers must let you transfer your pensions for free. Whether you’re looking to transfer your stakeholder pension into a SIPP, workplace pension, or another stakeholder pension, you can do so without cost.

Who can have a stakeholder pension?

Anyone can open and contribute to a stakeholder pension, whether you are employed, self-employed or unemployed. You can have a stakeholder pension pot as well as a workplace pension - indeed, it doesn't matter how many different pensions you have, provided you don't exceed your allowances (how much you can pay into them). Sometimes, your workplace pension might take the form of a stakeholder pension, or you could ask your employer to pay their contributions into your existing stakeholder pension.

When can I cash in my stakeholder pension?

You can access a stakeholder pension at any age from 55 onwards. However, it’s sensible to leave it as late as possible, since your pension needs to last you for the rest of your retirement. Remember too that once you’ve started to access your stakeholder pension, you can no longer pay as much into it (your annual allowance will drop from £40,000 to just £4,000). Therefore if you are still earning, it’s prudent to avoid accessing your pension until you have retired (or very shortly before).

You have several options for accessing your stakeholder pension. These include:

• Taking a tax-free lump sum of 25 per cent of the pot
• Buying an annuity (a guaranteed income for life)
• Using drawdown (a flexible income that may run out)

You can even take your whole pension pot as a lump sum. However, this is not recommended. You will face a much bigger tax bill by doing this, and unless you intend to spend all your pension in a single year, you are generally better off leaving it invested in your pension fund. If you do plan to spend it all in a single year, you then need to consider the question of what other income you can live on for the rest of your retirement.

Talk to a financial adviser about setting up, managing or accessing a stakeholder pension.