Stakeholder Pension Schemes - Pros and Cons

Does the State Pension Provide Sufficient Retirement Income?

Jan 7, 2009 Asa Ghaffar

Stakeholder pension schemes were brought in to help provide additional retirement income. Is relying on the state pension really a good idea in the future?

Most experts regard the state pension as insufficient to retire on and the majority of people seem to agree. According to a survey by Friends Provident, 75 per cent of 3,056 adults questioned think that the state pension is not sufficient to live on, while 36 per cent feel that they will struggle to make ends meet during their retirement.

Stakeholder pension schemes were introduced to provide a superior retirement income. As well as providing a 25% tax-free lump sum, this additional pension pot will greatly help to prevent retirement poverty.

Advantages of Stakeholder Pension Schemes

Portability. No charges are incurred for transferring a stakeholder pension to a new provider. This feature is vital due to the number of times employees now change jobs;
Lower management charges. New stakeholder pensions charge a maximum of a 1.5% management fee for the first 10 years and 1% thereafter. This is vastly more competitive than most pension schemes;
Tax breaks. Those paying into a stakeholder pension will receive tax relief on all contributions. Higher rate tax payers will receive tax relief at the 40% rate via self assessment;
Greater affordability. With minimum monthly contributions starting at £20, stakeholder pensions are vastly more accessible to the masses;
Matched personal contributions. Many companies will make a matching contribution into a stakeholder pension plan as part of a benefits package;
Accessibility. The self-employed and unemployed have access to a stakeholder pension scheme. Up to £3,600 can be paid in each tax year.

Disadvantages of Stakeholder Pension Schemes

Some companies don't offer schemes. Whilst there is a requirement placed on companies to provide a stakeholder pension scheme, a number of companies are exempt from this provision. For example, smaller companies that employ less than 5 people;
False hope. People may think that paying the minimum £20 into a stakeholder pension will be sufficient to retirement fund, but it won't. Talk to an Independent Financial Advisor (IFA) to work out how much needs to be contributed monthly to produce an adequate retirement income;
Pension rules. Current pension rules only permit 25% of a pension pot to be taken as a tax-free lump sum. Also, an annuity has to be purchased before the age of 75.

Depending upon only the state pension for a retirement income isn't really a smart move. If not already in an occupational pension scheme, it is important to check with an employer to see how their stakeholder pension scheme works and whether they match personal contributions.

Those who found this article useful may be interested in reading about securing higher returns from a stocks and shares ISA or deciding whether a cash ISA or savings account is preferable. Finding out about level term life insurance is also vital for those with young families.

The copyright of the article Stakeholder Pension Schemes - Pros and Cons in Retirement Planning is owned by Asa Ghaffar. Permission to republish Stakeholder Pension Schemes - Pros and Cons in print or online must be granted by the author in writing.