Description

Introduced in April 2000 Stakeholder pensions were designed as a vehicle to extend private pension provision. They are effectively PPPs with a restriction on the provider’s charges so that they cannot exceed 1% of the value of the fund each year. This is increasing to 1.5% Employers with 5 or more employee must provide access to a Stakeholder facility but they do not have to contribute to it.

Examples of use

• The self-employed including sole proprietors and partners taxed under Schedule D.
• Employees who don’t have access to an occupational pension scheme.
• Members of occupational pension schemes who would like to make additional pension payments.
• Members of contracted in occupational schemes who wish to contract out of the State Second Pension Scheme (S2P). See Appropriate Personal Pensions. 
• Individuals who have no earnings but who wish to invest up to £3,600 in any tax year into a product offering tax relief on contributions and investment in funds which are mostly tax exempt.

Advantages

• Contributions are eligible for tax at the individual’s highest rates of tax.
• Contributions are invested in funds that are mostly tax exempt.
• Part of the accumulated fund can be taken as a tax free lump sum at retirement.
• An individual may effect more than one PPP (subject to the contribution limit) thereby enabling ‘phased’ retirement to be taken.
• Death benefits can be written under trust to avoid Inheritance Tax exposure.
• The policy is the property of the individual.
• Benefits can be taken from age 50 (will become 55) for all and earlier in the case of specified occupations. Actual retirement is not required in order to take benefits.
• Term assurance can be bought under same revenue rules and tax relief claimed.

Disadvantages

• There is a limit on the amount of annual contribution. This is 100% of an individuals earnings, or £215 000 (2006/07), whichever is the smaller.
• There is a limit on the amount of fund that can be built up without benefits being taxed. This is currently £1 500 000 (2006/07).
• This is a cpotentailly complicated area, in which the rules have recently changed. If anyone is anywhere near using their overall limits, then proper professional advice is required.
• The range of investment funds available is often restricted as a result of the restrictions on charges.

Points of interest

• Stakeholder pensions have helped introduce competition into the pensions market and this has reduced charges significantly.