Stakeholder pensions: simple, low-cost… basic?
A stakeholder pension plan is a basic, low cost pension arrangement. It is a form of defined contribution plan, and can be an individual plan or part of a group arrangement set up by an employer.
The stakeholder pension was designed to meet the government’s minimum standards. They were commonly offered to employees of smaller firms. This was in order for the company to comply to government rules to provide a pension arrangement to a workforce of over 5 staff.
Minimum standards of stakeholder pensions
The stakeholder pension keeps to three key standards:
- A low minimum contribution requirement, of £20 (gross)
- To offer a default investment fund to members not wanting to choose an investment strategy
- To have capped charges. The cost of a stakeholder pension cannot be higher than 1.5% per annum for the first 10 years, and 1% pa thereafter.
Stakeholder pensions replaced by workplace pensions
Stakeholder pensions became less popular as new workplace pension rules were introduced. The workplace pension rules have no minimum staff requirement, and compel both the company and employee to make regular pension contributions unless the member applies to opt-out.
Most stakeholder pensions held today are inactive or dormant. This means they are just pension ‘pots’ with no active contributions. It’s always important to review any inactive pensions. Cost and investment strategy are the key components to the success of a pension plan.
Benefits & drawbacks of stakeholder pensions
- Offer the member reassurance over costs, as they must comply to annual cost-caps
- Provide a low-cost pension savings vehicle for those only wanting to save a modest amount
- Provide basic mixed-asset investment strategies for those less interested in controlling their money
- Act as an effective low-cost pension savings plan
- Only offer a basic investment funds with a limited investment range
- Do not offer at-retirement functions such as income drawdown
- Many modern pensions are lower cost than stakeholder pensions, particularly for larger fund values
Membership in a Group Stakeholder Pension
A Group Stakeholder Pension Plan is simply a collection of basic stakeholder pensions. They are provided by an employer for their staff. Each member holds their own pension, but they may form part of a group for the ease of administration of the employer.
Setting up a Group Stakeholder in years past has helped an employer to run pension contributions through a payroll for all staff, and meet the minimum government staff pension benefit requirements. Minimum staff pension rules have now been replaced by workplace pension rules, for example Nest and The People’s Pension.
Simple, low-cost, basic pension
Stakeholder pensions were designed to be basic and low cost, with limited functions. For anyone with modest pension wealth or needing a vehicle for very low regular contributions, the stakeholder pension may remain suited.
Pension savers should review their pension arrangements regularly. Those with stakeholder plans should pay close attention to costs and investment performance. Ask your pension provider for a list of investment options. Under a stakeholder plan, investment options are limited, often graded by risk. If you only have a small pension fund, you may feel comfortable picking a simple investment strategy for your pension.
While the costs within the plan will remain within the stakeholder cost-cap, consider if they are at the higher-end (1% pa). Private pension plans have modernised and most offer a very low-cost plan with full online access and a wide range of investment options.
Too simplistic for larger pension fund values?
For those building pension wealth and preparing for retirement, a more modern and functional pension may be better suited. To move funds out of a stakeholder pension there will be no costs or exit penalties applied.
Stakeholder pensions are provided by major pension companies such as Standard Life and Aviva. Major pension providers also offer alternative, modern pension plans. Ask your pension provider what other options are available and you may be surprised by them telling you about a lower cost and better functioning pension plan with a very simple switching process.