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

A stakeholder pension is a type of personal pension that you can set up yourself.

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. With a defined contribution pension, the contributions you make to your pot over time, plus investment growth, are what determine the amount you get in the end.

The idea is that the assets in which you invest will increase in value, 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 few ways from the age of 55 (rising to age 57 by 2028)..

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 pensions can be puzzling at first.

There are three kinds of personal pensions: stakeholder pensions, self-invested personal pensions (SIPPs), and ‘personal pensions’. For clarity, we’ll call this third group ‘standard personal pensions.’

Stakeholder pension vs personal pension: what are the differences?

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

• A stakeholder pension may have lower annual charges. These are limited to 1.5% of the pot size for the first 10 years and 1% after that (if an employer uses one to abide by automatic enrolment rules, the charge cap is 0.75%).

• A stakeholder pension must allow a low minimum contribution level of £20 a month or less.A stakeholder pension might invest in a narrower range of funds, which may result in lower growth (but not necessarily).

Stakeholder pension vs SIPP: what are the differences?

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

• A stakeholder pension may invest 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, usually from a wide choice offered by an investment platform.

• 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 - if you select many funds.

• A stakeholder pension may deliver lower growth, but may 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 were commonly offered by employers before auto-enrolment was introduced in 2012. Although these schemes have largely been replaced by auto-enrolment, some people may still be contributing to them. 

If you joined a group stakeholder pension scheme before auto-enrolment and are still contributing, your employer must continue processing your payments until you stop contributing or leave your job.

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 to 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 enough selection of investment options.

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.

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?

Currently, you can access a stakeholder pension at any age from 55 onwards, although this minimum age is set to increase. However, it’s sensible to leave it as late as possible before accessing your pension savings, since your pension needs to last you for the rest of your retirement.

Remember, too, that once you’ve started to take money out of your stakeholder pension, the amount you can pay in each year will drop from £60,000 to just £10,000 due to the money purchase annual allowance (MPAA).

If you are still earning, it’s prudent to avoid accessing your pension until you have retired (or shortly before), if possible.

You have several options for accessing your stakeholder pension.

These include:

• Taking a tax-free lump sum of 25% of the pot

• Buying an annuity (to get a guaranteed income for life or a fixed period).

• Using drawdown (a flexible income that may run out)

• Taking several lump sums from your pension (each 25% is tax-free, the remaining 75% is taxed).

If you wanted to, you could even withdraw your whole pension pot as a lump sum, but 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 plan to spend it all in a single year, you then need to consider what other income you have to live on for the rest of your retirement.

Get expert stakeholder pension advice

Stakeholder pensions are a valuable option for building your retirement savings, offering features such as low annual charges and the flexibility to make contributions according to your circumstances.

These pensions are designed to be accessible and straightforward, making them a suitable choice for many. Whether you’re setting up a new pension or managing an existing one, understanding how these schemes operate and the impact of accessing your funds is crucial for effective retirement planning.

Let Unbiased quickly match you with a financial adviser for expert financial advice tailored to your retirement planning needs and to help you navigate your options with a stakeholder pension.