Retirement:
Stakeholder pension schemes offered by employers

From October 2001 most employers with 5 or more employees who do not already offer a suitable pension scheme must offer access to a stakeholder pension. Strictly speaking these are not occupational pension schemes, the employer is simply agreeing to collect your contributions via the payroll and pass them to the selected pension scheme.

A stakeholder pension is a particular form of personal pension. It was introduced from 6 April 2001 with low minimum contributions (�20 per month), low cost transfers to and from other schemes and a maximum annual administrative charge of 1% of the fund value. However, since April 2005 this maximum charge has been raised to 1.5% for the first 10 years.

The employer selects a pension provider (for example an insurance company) as the designated provider. The employees can then take out a stakeholder pension with this company via their employer. It is not an occupational pension scheme in that the employer is not operating the scheme they are merely offering easy access to the scheme. The pension contract itself is between the designated provider and the employee.

The employees pension contributions are subject to the usual personal pension limits and, like occupational pension schemes, they are deducted from their pay by the company. The company then passes the contributions to the designated provider.

The obligations of the employer are met by offering access to the scheme. It is up to the employees whether they choose to take up the offer.

Contributions

The total employee and employer contributions cannot exceed the annual allowance. This is currently �215,000 rising to �255,000 in the 2010-2011 tax year. If contributions exceed this level a tax charge of 40% is placed on the excess. The exception to this is in the same year that the benefits are taken, when there is no limit to the level of contribution.

To obtain corporation tax relief, however, the contributions must be demonstrated to be a wholly and exclusive business expense to the local inspector of taxes.

To obtain tax relief on the personal payments, the gross contributions must be no more than the greater of �3,600 or 100% of earnings and under the annual allowance level.

The pension benefits available

The benefits paid on retirement depend on the amount of contributions that have been paid and the investment return achieved. Generally the fund built up at retirement can be taken as a tax-free pension commencement lump sum of not more than 25% of the fund with the balance being used to provide a pension.

Example

Mr B has worked for PQR Ltd for 35 years and was a member of their group personal pension scheme. At retirement Mr B had a pension fund of �200,000 which gave him the following pension benefits:A pension lump sum of 25% of the pension fund = �50,000 An annual pension bought with the remaining fund (�150,000) = �12,000

The majority of people buy an annuity with the balance of the fund. This gives them an annual pension an can include options such as an increasing pension, a dependant�s pension or a guaranteed period of payment.

Related literature:

What is an annuity?

An alternative to buying an annuity is unsecured income pension fund withdrawal. Instead of purchasing an annuity, draw an income from the pension fund directly. There are limits for the amount you can take each year based on the Government Actuaries Department limits.

Related literature:

Pension fund withdrawal

What happens if I leave the scheme?

Unlike other pension schemes offered by your employer, you can take your stakeholder pension with you when you change jobs. You have the following options:

to leave your pension fund where it is to continue to benefit from investment growth (but without further contributions) until your reach your normal retirement age, or

to transfer the value of your pension fund to another pension scheme.

to continue contributing to the plan

It is important to take professional advice as to the best option for you. With other personal pension schemes if you are no longer contributing to a pension fund with a high level of management charges, these charges can seriously erode your ultimate pension benefits particularly if the scheme has poor investment growth. If you wish to transfer your pension fund to another pension scheme your original pension fund holder may impose substantial penalties reducing the fund available to transfer. However with stakeholder pensions they have low management charges and low cost transfers to other pension schemes so these factors may not be such an issue.

What happens when I die?

As with other personal pensions you will receive the following death benefits:

If you die before you start receiving your pension the value of your fund will be paid to your estate or to an individual you have previously nominated to receive the fund on your death.

If you die whilst receiving your pension as an annuity the death benefits will be those selected by you when you purchased your annuity, typically a pension for your spouse or other dependants together with any amounts outstanding in respect of a guaranteed period.

If you die whilst receiving your pension as income drawdown you will generally have had the option of nominating that the fund is to provide benefits for your spouse or other dependants. They will have the option of: