Ethical Stakeholder Pensions
In 2001 The Government introduced a new type of pension plan, for all those that have no access to an employer's pension scheme, known as the Stakeholder pension. It is also ideally suited to the needs of the self employed
This plan has fundamentally changed the way in which individuals plan for their retirement. At the heart of the plan is a charging structure set by Government. Instead of insurance and investment companies charging what they want for their Personal Pensions, if a company is to offer a stakeholder plan, they must conform to the charges and flexibility rules contained within the legislation.
The Government and the Financial Services Authority (FSA) feel that the low charges leave little room for advice. The FSA has introduced Decision Trees which are essentially flow charts that will act as a guide to retirement planning under the stakeholder regime. These flow charts are available from the FSA's website, www.fsa.gov.uk. Further information on stakeholder pensions is also available from the Pensions Advisory Services (TPAS), http://www.pensionsadvisoryservices.org.uk.
At Ethical Investors, we wholeheartedly support the stakeholder pensions, and are keen to advise individuals as well as groups of employees on establishing their own ethical stakeholder plan. Although the Government feels that pensions are so simple that no advice is needed, the reality is that without advice, you cannot be sure that your most valuable long-term asset is invested to meet your social and environmental concerns, as well as maximise the financial returns.
To check to see how much you should be paying, and to calculate your retirement income, use the Pensions Calculator.
What is a Stakeholder pension?
A Stakeholder pension is not a State pension - it's a private pension on top of the Basic State Pension. Stakeholder pensions are available to people in employment, fixed contract workers, the self-employed and people who may not be working but can afford to contribute. From 6 April 2001, those who give up work to care for relatives, start a family or take a break from work can continue to contribute to their stakeholder pension, up to £3600 per year gross (£2880 net).
As with most other pension plans, you can pay in contributions regularly to build up your own Stakeholder pension fund. You can also make occasional lump sum contributions.
Your Stakeholder fund is used to buy a pension (usually called an annuity) from a pension provider when you retire (this does not have to be the same provider with whom you hold your stakeholder pension fund). So, your income in retirement will depend on the size of your fund and the annuity rates available at the time you take your pension. You can't withdraw any part of your fund before age 55 but you can convert part of it to a tax-free lump sum (up to 25% of the fund) when you take draw your benefits.
The manager of your Stakeholder pension fund will invest your contributions and income tax rebates in assets, such as shares and bonds. This is why it's important to start investing early if you can - the longer your contributions are invested the greater opportunity they have to grow and to ride out the inevitable ups and downs in financial markets.
Stakeholder standards
Pension and investment companies that provide Stakeholder pensions must make sure that these pensions meet strict standards laid down by the government. The standards include:
Charges
There is a limit on the management costs which Stakeholder pension providers can charge - the limit is a maximum charge of 1.5% of the value of your fund each year for the first 10 years, and thereafter a maximum of 1%. The fund manager takes these charges from your fund.
Flexibility
Stakeholder pension plans are flexible and you can make contributions regularly or occasionally. It is generally best to discipline oneself to make regular weekly or monthly contributions, but you can change the amount you pay in if you need to. All Stakeholder pension plans will accept contributions of as little as £20 gross (£16.00 net). You can stop paying in for a while if you need to, without having to pay any penalty. If you are employed and your employer provides a Stakeholder pension, they will, if you wish, deduct your contributions direct from your pay.
Information
Your Stakeholder pension plan provider must give you regular information about the plan you have joined. This information will include an annual statement to let you know how much you have paid in and details of how your fund is doing. It may also include a forecast of your pension on retirement.
Your Stakeholder pension plan provider must give you regular information about the plan you have joined. This information will include an annual statement to let you know how much you have paid in and details of how your fund is doing. It may also include a forecast of your pension on retirement.