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. Or, you may have a stakeholder pension through work.

A stakeholder pension is a defined contribution pension, which means you pay money into a pot and this money is invested in a range of assets such as stocks and shares. 

The amount you eventually get is not guaranteed and will depend on the amount you pay in and the performance of your investments over time.

From the age of 55 (rising to 57 in 2028), you’ll be able to access this pot in a number of ways.

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

What is a stakeholder pension, and how does it work?

A stakeholder pension is a type of personal pension designed to be highly flexible, accessible, and low-cost. You pay money into a pot and this money is then invested in a range of assets.

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 they must meet certain minimum standards, set by the government.

• Pension charges 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%).

• It must have a minimum contribution level of £20 a month or less.

• It must offer flexible contributions (so you can stop and start payments) and offer a default investment option.

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, may require more attention, particularly if you invest in more adventurous assets or have lots of holdings in your portfolio.

• A stakeholder pension may have slightly higher management fees than a SIPP - if you select many funds or trade regularly.

• 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.

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 more modern pensions, 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.

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).

In some cases, your workplace scheme may be a stakeholder pension.

When can I cash in my stakeholder pension?

The rules for accessing stakeholder pensions are the same as any other defined contribution pension.

Currently, you can access a stakeholder pension at any age from 55 onwards, although this minimum age is set to increase to 57 in 2028. 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 make a taxable withdrawal from 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)

• Uncrystallised fund pension lump sums (the first 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.

Can you transfer a stakeholder pension?

Pension providers must let you transfer your pensions - and that applies to stakeholder pensions too.

Exit fees have been scrapped for pensions opened after 31 March 2017. If you opened a pension before then, an exit fee may apply, but it will be capped at 1% for those aged over 55 (or 57 from 2028).

Is a stakeholder pension right for me?

Stakeholder pensions were introduced in 2001 as part of government attempts to encourage more people to save for retirement - especially lower earners.

However, over the last two decades pension provision in the UK has changed substantially. 

Personal pensions and SIPPs are now much cheaper and more flexible than they were 20 years ago. 

As a result, the market for stakeholder pensions has shrunk dramatically and there are now only a few providers remaining. 

That means it’s important not to assume that a stakeholder pension will save you money or be any more flexible than the alternatives.

Get expert stakeholder pension advice

A stakeholder pension may work for you: they are straightforward and easy to understand. However, many people will find that they get better value with a personal pension or a SIPP when they compare the full range of options available.

If you aren’t sure what type of pension is right for you - or what you should do with an existing stakeholder pension - it’s a good idea to get professional advice.

In addition to helping you choose the right pension for you, they can also offer advice on how much you should be saving, where to invest your contributions and what to do with any existing pensions you might have.

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.