A TUC guide for anyone who works wanting to know about Stakeholder Pensions

Can't join a pension scheme where you work?

Want to save for retirement?

Don't know which scheme would be best for you?

Here's what you need to know.

This page is for anyone who wants to know about stakeholder pensions and is thinking of joining a stakeholder pension scheme. It covers the most frequently asked questions but if you have a questions that we haven’t covered you can ask us here or call Prudential’s UK-based team of experts on 0845 070 6666. Lines are open from 9am to 7pm Monday to Friday and 9am to 1pm Saturday. Calls may be monitored or recorded for quality and security purposes..

What are Stakeholder Pensions?

Stakeholder pensions are low cost pensions that people can take out to provide or boost their income after retirement. Through the contributions paid, the tax relief and the investment returns earned, people can build up a fund which they can use to buy a pension when they are older or retire. Because stakeholder pensions have to satisfy a number of minimum standards set by the government, they are secure, flexible and offer value for money. They are available to almost everybody but are primarily designed for people without access to an employer sponsored (occupational) pension arrangement.

Does your employer offer a stakeholder pension scheme?

Fill in the questionnaire to let us know.

Find out more about what employers must do here.

You can either join the stakeholder pension provided though work, or you can contribute to another stakeholder pension which you have chosen yourself. If your employer offers a stakeholder pension scheme, you will not be forced to join it. However, you should consider doing so very seriously, especially if your employer contributes to the scheme.

What are the alternatives?

There are a number of alternative methods that allow you to save for your retirement.  These may include a facility to ‘top up’ your pension attached to an occupational scheme or you may be eligible to contribute to other registered pension schemes.  If you are in any doubt you should seek independent financial advice for which you may be charged.

What is the minimum I can contribute to a Stakeholder Pension?
The legal minimum is £20 but some schemes allow you to pay in less.  The TUC Stakeholder Pension Scheme permits a minimum contribution of £10 and you can pay weekly, monthly (or at other intervals) or make individual lump-sum payment(s).

What is the maximum I can pay each year?

There is no limit to the amount that can be invested in a stakeholder pension scheme. However, tax relief can only be obtained on contributions up to £3,600 or 100% of your earnings, if greater.  This limit applies to total contributions to all pension schemes over a tax year.   Your total contributions in any one tax year may not exceed the ‘Annual Allowance’ – an overall limit set by HMRC otherwise you will incur a special tax charge.  For the tax year 2009-2010 this limit is £245,000. This Annual Allowance doesn’t apply in the year you take all your benefits.  To find out more about overall limits set by HMR&C follow the following link:  http://www.pensionsadvisoryservice.org.uk/Miscellaneous/Pensions_Simplification/

Can I take out a stakeholder plan if I’m not working?

If you have no earned income, you can still pay up to £2880 into a stakeholder pension scheme and obtain basic rate tax relief.  This means that if you pay a contribution of £3,000, £3,600 will be invested for you.

Remember…

We all need to start thinking about saving for retirement. The sooner you start saving for a pension, the longer your money will have to grow and the better off you could be when you retire!

Questions and answers

How old must I be to take out a plan?

If you are employed you can start making payments when you are 16.  If you are not working you can begin making payments from age 18.

How much pension will I get when I retire?

The value of your pension when you retire is not guaranteed.  This will depend on:-

• how much you’ve paid in,
• how long your money has been invested,
• the annuity rate (the rate at which your fund can pay a pension) at the time you take your benefits
• investment performance over the time your money has been invested
• the choices you make when you retire.

Must I buy a pension with the value of my plan or can I choose other benefits?

If you have a TUC Stakeholder Pension plan and your employer is making regular payments you can choose to take out life cover which will increase the amount your plan pays out if you die before you start taking a pension (see also below – ‘What happens if I die before retirement’).

There are no restrictions on the amount of life cover you can have. However, in certain circumstances the purchase of this benefit may give rise to a tax charge.   Further details on this can be found in our brochure ‘Key Features of the Stakeholder Pension Facility’. To obtain your copy of our Key Features brochure and other relevant information, please contact us on 0845 070 6666  or request an information pack here.   Our helpline telephone numbers are open from 9am to 7pm Monday to Friday and 9am to 1pm Saturday.  Calls may be monitored or recorded for quality and security purposes.

What choices will my TUC Stakeholder Pension Plan provide when I retire?

• You can convert your entire stakeholder pension plan to a pension or you can take up to 25% of the fund value as a tax free lump sum and use the balance to buy a smaller pension which will be taxable through the PAYE system.
• You can choose to buy a level pension (a pension that pays out the same amount at each payment date for the rest of your life) or an escalating pension (a pension that increases each year)
• You can choose to buy a pension that provides an income for your spouse, civil partner or other dependants when you die
• You can exercise your open market option. This means that you can choose to buy your pension from an alternative product provider.

These are just some of the options that are available to you when you retire.  Stakeholder pensions are designed to be flexible and provide you with choices and options which will suit your circumstances.  Please remember though that many options cost more so your initial pension could be lower.

When will I be able to retire?

You will normally be able to start taking benefits from your stakeholder pension at any age between 50 and 75. However, the minimum retirement age is rising to 55 from 6 April 2010.

Will I still get my state pension?

Yes. Your stakeholder pension is on top of any state pensions you are entitled to. Providing you have paid enough National Insurance contributions over your working life, you will also get the basic state pension.

What about Pension Credit?

If you are eligible for Pension Credit when you retire, any pension paid to you from your plan after retirement may affect your entitlement.  Pension Credit is an entitlement which guarantees a minimum income to people aged 60 and over living in Great Britain. To find out more about Pension Credit, visit www.thepensionservice.gov.uk/pensioncredit/home.asp

How will I know how my plan is doing?

The law requires that the trustees or stakeholder manager must provide you with regular information.  This includes an annual statement detailing how much you (and your employer if applicable) have paid in and how your plan is doing.  If you have a TUC Stakeholder Pension Plan you don’t have to wait for your yearly statement to see how your fund is progressing.  You can get an up-to-date valuation from our TUC Stakeholder Pension Customer Service Centre on 0845 070 6666. Lines are open from 9am to 7pm Monday to Friday and 9am to 1pm Saturday.  Calls may be monitored or recorded for quality and security purposes.

Can I have a refund of my contributions?

A stakeholder pension scheme is a savings plan to help you save for your retirement in a tax-efficient way.  You can take your retirement benefits at any time from the minimum age of retirement.  The current minimum age at retirement is 50 although this is rising to 55 in 2010.  You can, however, transfer the value of your stakeholder plan to a different stakeholder pension free of charge.  It may not be in your best interests to transfer existing pension arrangements and we recommend that you seek financial advice prior to doing so.

How does the tax work?

Employers - payments are a deductible business expense. Your tax advisers will have full details.

Employees –

• Tax relief on any payments you make will normally apply up to £3,600 or 100% of your earnings, if greater, subject to certain overall limits. This tax relief is sent direct to the trustees or stakeholder pension scheme manager direct by HMRC.  The basic rate of tax is 20%.  This means that for every £80 you pay into the plan, HMRC will pay an extra £20 into your plan.   If you pay tax at the higher rate (40%), you will be able to claim back the tax difference from HMRC through self assessment at the end of the tax year. 
• Your money will grow in a largely tax free environment helping it to grow faster
• If you choose to take a cash lump sum at retirement it is currently tax free.  Your pension will be taxed as earned income through the PAYE system
• If you die before retirement there is normally no inheritance tax payable on the value of your plan.

The above is based on our understanding, as at April 2009, of current taxation, legislation and HM Revenue & Customs practice, all of which are liable to change without notice. The impact of taxation (and any tax relief) depends on individual circumstances.

What about Contracting Out?

If you are employed you can normally contract out of the State Second Pension (this used to be called SERPS).  This means that you give up your right to a State Second Pension for the period that you are ‘contracted out’.  Instead, HMRC will pay a rebate of part of both your own and your employer’s National Insurance contributions into your stakeholder plan.  The money paid into your plan in this way is called your ‘Protected Rights’ fund.  This rebate is set by the Government at a level such as to give a reasonable chance that the replacement pension arising from your ‘Protected Rights’ will be at least as big as if you had remained in the State Second Pension.  There is no guarantee that you will be better off in retirement by ‘contracting out’.  Whether or not to contract out is an important decision.  If you want help making or reviewing your decision you should consult a financial adviser.

Tell me more about the TUC Stakeholder Pension Scheme

The TUC Stakeholder Pension Scheme, administered by Prudential, is designed to be one of the best stakeholder pension schemes on the market, providing high quality benefits to working people and their families.  Benefits include:

• a pension when you retire, including a tax-free lump sum option
• benefits for your spouse or partner when you die
• flexibility to stop and start or change your level of contributions
• Low charging structure.  The annual management charge is 0.85% of the value of your plan
• An exciting range of funds covering all attitudes to risk – you can choose up to 10
• The ability to switch your money between funds completely free of charge
• Low £10 minimum starting contribution
• Trustees to help make sure your pension is safe.

Find out more about the TUC Stakeholder Pension Scheme and how to join our scheme.

If you have any questions which are not answered above, please fill in this form.

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Please note that the effect of legislation, particularly concerning taxation, will depend on the financial circumstances of the individual and is open to different interpretations and future changes. Remember that the pension you get, after taking the tax-free lump sum, is taxed as earned income.

This web page has been approved by the Prudential Assurance Company Ltd. which is authorised and regulated by the Financial Services Authority.