A Pension is a regular payment made to a person that allows them to subsist without requiring them to work. If it is from the Government it’s known as a State Pension. There are many different kinds of pension, and this guide should help make it clear the requirements, entitlements and benefits you will receive.
Stakeholder Pensions
This is a secondary pension in addition to your State Pension, designed to increase your retirement income to suit the lifestyle you desire when you retire. Stakeholder pensions are intended as a low-cost means for people without an occupational pension or large enough personal pension for their requirements. If you are employed you may already have an occupational pension which fulfils this requirement.
Since they are intended for people from low to medium income the benefits of a stakeholder pension reflect this. Charges for a stakeholder pension are capped at 1% and the minimum monthly contribution is £20, though your employer may pay additional contributions into your stakeholder pension.
Stakeholder pensions are available from many financial institutions such as insurance companies, banks and building societies. Other organisations such as trade unions also offer stakeholder pensions to their members. If you are employed, your employer must provide access to a stakeholder pension unless the company is exempt from this requirement. There is no fee to switch stakeholder pension provider.
Exemptions include:
The company has fewer then 5 employees.
The company offers an occupational pension scheme for all their employees to join after their first year of employment.
The company may also be exempt if they offer to place at least 3% of each employee’s earnings into another form of non-state pension for their employees.
If you are self-employed, you are entitled to a basic State Pension, but you cannot get any additional state pension. It may therefore be wise to consider a separate stakeholder pension to give you a higher income then a basic state pension upon retirement.
If you are an employee, you can choose to be contracted out of your additional State Pension. This will still mean you pay National Insurance Contributions at the full rate. The Inland Revenue will then pay a National Insurance Contribution rebate straight into your stakeholder pension scheme. The size of the rebate is based on earnings and age so the older you are the higher the rebate will be.
Tax Relief on Stakeholder Pensions
Anyone paying contributions into a stakeholder pension is entitled to tax relief on their contributions. For someone on the basic rate of income tax, every £100 placed in your pension will earn a rebate of £22. On the highest level of income tax the same £100 will earn a rebate of £40. (Based on 2003/4 figures).
What is the most I can contribute?
You can contribute a maximum of £3,600 a year towards your pension, including any contributions made by your employer and any tax relief you receive from the Inland Revenue. It does not include the National Insurance rebate if you have chosen to be contracted out of additional state pension schemes (such as SERPS or State Second Pension). If you wish to contribute more, please see leaflet ‘IR3 – Personal Pension Schemes – a guide for members of tax approved schemes’ available from the Inland Revenue.