Every survey over the past decade has shown we’re not saving enough for retirement. But the simple no-frills stakeholder pension scheme gives everyone the opportunity to boost their retirement income.
If you are a full-time career worker and a member of your employer’s final salary pension scheme, read no further. You are a member of the pension elite and should be OK in retirement. But for every one of you there are 20 others who won’t be OK unless they save more.
The stakeholder pension scheme was introduced to enable people with no, low or erratic earnings, and workers whose employers don’t run employee pension schemes, to accumulate a pot of money for retirement. The charges are capped by legislation at 1.5% a year for the first 10 years and 1% a year thereafter. The contribution rules are simple:
Halifax stakeholder pension: start saving for your future
How much can you put in your stakeholder pension?
• If you have no taxable income, you can contribute up to £2,808 a year (£2,880 from April 2008). The scheme provider reclaims tax relief, so that on your £2,808 contribution, a further £792 (£720 from April 2008) is paid by the Treasury and you end up with £3,600 in your fund.
• If you have taxable earnings, you can contribute an amount up to those earnings in each tax year. Again, you will make a net payment to the fund, the scheme provider will reclaim tax relief from the Treasury and this will be added to your account.
The maximum age at which you can contribute is 75 but there is no lower limit.
After the age of 55 and before age 75 (you choose when), you can take 25% of the fund as a tax-free lump sum and the rest is used to buy you a pension income for life.
Compare stakeholder pensions with our best buys
Changes from 2012
Since stakeholder pensions were introduced, the pension landscape has changed with new legislation that will bring in Personal Accounts from 2012. These will cater for workers whose employers don’t currently run pension schemes.
But that leaves five groups of people who won’t be eligible for Personal Accounts but can use stakeholder pensions to save for retirement.
Changes to the state pension system mean that you will only need 30 years (NI contributions or qualification as carer) to get a full state pension, which will help many more women to qualify for this.
Scottish Widows stakeholder pension: learn more here
Pension seekers *1: Time off for motherhood
Many mothers like to take several years off work when they start a family. Great for the kids but not so great for the retirement fund! Set up a stakeholder pension because you can chip in up to the net annual limit (£2,880 year) and get £720 added to it by the Treasury. It doesn’t matter where the money comes from- your own savings account, your husband, the lottery winnings…
Assume you have five years as full-time mother and put in the £2,880 maximum each year, and then go back to work at age 35. By the time you’re 55, the stakeholder pot should be worth about £55,000 and at 65 you should be able to take £23,000 in tax-free cash and have a pension income for life of about £330 per month.
Compare stakeholder pensions with our best buys
Pension seekers *2: Unsure earnings from self-employment
A majority of self-employed people have such low and erratic earnings that they don’t put anything into retirement savings. And they rightly don’t want to sign up to a fixed contract with penalties if they drop out.
Neither applies with stakeholder - you can stop and start again without penalties. You don’t have to worry about the complexities of tax relief- on contributions up to £2,880 a year, it’s collected automatically for you by the scheme provider.
Retirement age is up to you: at any time from age 55 to age 75 you can start taking money out of your plan.
Halifax stakeholder pension: start saving for your future
Pension seekers *3: Time for a change
The career break is a relatively new feature of working life. But every year thousands of people leave their jobs and retrain to do something completely different. That knocks back their entitlements from occupational pension schemes. You can use contributions (maximum £2,880 a year net) to a stakeholder plan to top up the retirement fund.
You are supposed to be resident in the UK to make contributions but if you are going off for a few months’ travelling, no-one is going to notice.
Compare stakeholder pensions with our best buys
Pension seekers *4: Never too late
Many people ‘retire’ without much in the way of pension entitlement apart from the state pension. But they may have savings - or their partner may have savings - which can easily be used to boost their income.
Simply start a stakeholder pension plan. You don’t have to have any taxable income and the upper age limit is 75. Say you have enough savings that you can ‘recycle’ £2,880 a year for five years from age 65 to age 70. Your total net contributions will amount to £14,400, the tax relief will add another £3,600 and with interest on your fund you should have about £20,000 in your account at age 70.
Some advisers operate schemes where each year, your contributions are used to buy pension income, so that you get an immediate return on the money.
Scottish Widows stakeholder pension: learn more here
Pension seekers *5: Never too early
There’s no lower age limit for stakeholder, so you can start a pension plan for a new-born baby. In terms of bang for your buck, the results are pretty mind-boggling, making this a great idea for grandparents who have money they plan to leave to the grandchildren when they die. By putting some into a stakeholder pension plan instead, they can set the child up with a retirement fund before they even start work.
Say the grandparents contribute £100 per month for ten years for the newborn child. By the time the child is aged 20, the fund should be worth about £25,500 and even with no more contributions it should top £115,000 by the time the child reaches the age of 50.
Stock market tracker fund for the long term
All stakeholder pension plans have to include a simple stock market index-tracker fund as one of the investment alternatives. For anyone who has more than 10 years to go to retirement, this is the right choice, because it is almost certain to provide a much higher return than ‘safer’ alternatives like deposits.
Once you get within ten years of retirement, you should review your plan regularly and perhaps switch some or all of the money to a deposit fund.
