Make a stake

By THIS IS MONEY
Updated:

 

IF YOU don't already have a company pension, the chances are that you will be offered the opportunity to invest in one over the coming months, because the Government is insisting that most employers offer access to a pension. It is likely that you will be offered one of the new stakeholder pensions. We explain what they are, how you can benefit and what to look out for.

What is a stakeholder pension? IT'S similar to an old- style personal pension, but much cheaper, flexible and more transparent. Crucially, there can be only one charge, which is an annual management fee of up to 1%. No other nasty hidden charges are allowed. You can also stop saving into it or transfer it without penalty. It's not earnings-related, so you don't have to be in paid work to have one.

Does my employer have to offer access to a stakeholder?
IF YOU are in a company that has five or more employees and does not have a pension scheme in place, your boss will have until 8 October to offer access to a stakeholder.

If not, the firm could be hit with a fine of up to £50,000 from Opra, the Occupational Pensions Regulatory Authority.

Your employer is not obliged to make a contribution, but if he or she does, then take advantage of it.

Where else can I get a stakeholder?
YOU don't have to take the scheme offered by your employer. You could instead invest directly with the big insurance companies. Those favoured by financial advisers include Norwich Union and Standard Life.

How much can I save?
YOU can save as little as £20 a month. The maximum basic contribution is £2,808 per tax year (6 April to 5 April). In addition to this, the Inland Revenue will give a basic rate tax relief top-up, making the final amount up to £3,600.

This top-up applies even if you don't pay tax, so it effectively turns every £100 you contribute into £128.

Higher rate taxpayers can also reclaim extra tax relief through self-assessment forms. However, higher earners will be able to save more using the personal pension limits, which depend on age and earnings. For example, for the under-35s it's 17.5% of earnings and rises to 40% for 65 to 74-year-olds.

What will my pension be worth?
THIS is impossible to say. Your money will be invested primarily in the stock market, which, over the longer term, tends to produce better returns than banks and building societies. At retirement you can take a quarter of your savings as a tax-free lump sum. The rest must be used to buy an annuity, which is a product that will pay an income for the rest of your life.

Can I choose how my money is invested?
LOOK for providers which offer a range of funds. One option is a lifestyle fund. In the early years, your pension pot should be heavily invested in shares.

As you come closer to retirement, money should be redirected into cash or fixed-interest to protect from stock market risk. All providers have a default option; your money will be invested in a fund automatically.

What if I already have a personal pension?
YOU can hold as many personal pensions and stakeholders as you want, so long as you comply with the contribution limits.

What if I am already in a company pension scheme?
YOU may still be able to pay into a stakeholder pension. If you are in either a money purchase or final salary scheme, you will be able to contribute to a stakeholder simultaneously, but only if you earn less than £30,000 a year. If your salary rises, taking you over this limit, you will have five years to continue making contributions.

Are there any pitfalls?
STAKEHOLDER pensions have not been flavour of the month with some financial salesmen and insurance companies, who make less money from them than old-style personal pensions.

Some are trying to hoodwink customers into taking poorer deals which will give them more in commission and charges. Steer clear of companies that use the term 'stakeholder friendly'. This usually means there are additional charges to the 1% yearly fee.

Also be careful of the 1% annual charge. To start with it looks fine, but if you build up a big pot it will eat away at your pension. Check out the providers that offer tiered charging structures that decrease as more money is put in.

Some unscrupulous advisers have persuaded employers to set up Group Personal Pensions (GPPs) rather than a stake-holder. GPPs can pay more commission to the salesmen. In some cases, GPPs can have high charges.

Opas, the Pensions Advisory Service, warns that some customers may have been misled on a number of issues, including regulations and charges. If you are in any doubt, call Opas on 0845 601 2923.

Sarah Broughton, 38, pictured with her husband Andrew, 46, joined her company stakeholder pension scheme, run by L&G, in May. She pays in 10% of her salary each year, but intends to put in more at a later date. The company does make a contribution to the pension.

Mrs Broughton likes the simplicity and low charges associated with stakeholder pensions. She adds: 'I am very aware of how much I should be putting away so that I end up with a decent pension.'

Most watched Money videos