Personal pension or stakeholder?

What is a personal pension?

Personal pension plans became available in 1988. An old-style individual plan known as a Retirement Annuity contract was available to individuals before this date, but these were traditional plans with little flexibility. With a personal pension, an individual decides on their level of contributions and then uses the fund they have built up to buy benefits at their chosen retirement date.

Personal pensions are available from banks, building societies and life insurance companies. They invest your savings on your behalf.

How do personal pensions work?

You choose a pension provider and arrange to make contributions. Most people pay something in every month – but some providers will let you pay in lump sums as and when you want to. However, there is a limit, known as the Annual Allowance, as to how much can be paid into your pension fund in each financial year.

Providers offer a choice of funds, which invest in different types of investments, with the aim of growing the fund over the years before you retire. You get tax relief on the contributions and your savings grow largely tax-free.

The size of your pension pot when you retire will depend on:

• how long you save for
• how much is paid into your pension pot over the years
• how well your investments have performed
• what charges have been taken out of your pot by your pension provider.

What is a stakeholder pension?

These are a low-cost personal pension introduced in 2001 to offer better value to those wishing to save smaller amounts. They are subject to certain minimum standards, covering areas such as charges, access and terms. 

Stakeholder pension features:

• low and flexible minimum contributions
• capped charges
• a default investment strategy, which can be helpful if you don't want to make investment decisions. 

Stakeholder pensions must meet minimum standards set by the UK Government including:

• a legal limit on charges – 1.5% a year of the value of your pension fund in the first ten years, then 1% a year. However, if an employer is using a stakeholder pension to meet their automatic enrolment duties these are subject to a charge cap of 0.75%.  (Please note: Dentons Wealth does not provide pensions for auto-enrolment).)
• charge-free transfers
• being able to stop or re-start contributions at any time, without penalty
• low minimum contributions of no more than £20 per month
• a default investment fund – your money will be invested into this if you don’t want to select your own funds.

Stakeholder pension vs personal pension - the differences.

Stakeholder pensions are similar to standard personal pensions, although there are a few key differences:

• A stakeholder pension may have lower annual charges - see above
• A stakeholder pension may allow a lower minimum contribution 
• A stakeholder pension might invest in a narrower range of funds which might result in lower growth (but not necessarily).

Despite these differences, a stakeholder pension works broadly in the same way as any other defined contribution pension scheme. 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).