The terminology around pensions can be puzzling at first.
There are three kinds of personal pensions: stakeholder pensions, self-invested personal pensions (SIPPs), and ‘personal pensions’. For clarity, we’ll call this third group ‘standard personal pensions.’
Stakeholder pensions are similar to standard personal pensions, but there are a few key differences:
A stakeholder pension is very different from a self-invested personal pension ( SIPP ). Specifically:
Despite these differences, a stakeholder pension works broadly in the same way as any other defined contribution pension scheme .
Stakeholder pension rules are the same as other personal pensions, in terms of how much you can contribute per year and in your lifetime , and how you will eventually access your pot.
If you need to, you can usually take a 'contribution holiday' from your stakeholder pension, temporarily suspending your pension contributions. This may be useful if your income fluctuates (e.g. if you are self-employed ).
Group stakeholder pensions were commonly offered by employers before auto-enrolment was introduced in 2012. Although these schemes have largely been replaced by auto-enrolment, some people may still be contributing to them.
If you joined a group stakeholder pension scheme before auto-enrolment and are still contributing, your employer must continue processing your payments until you stop contributing or leave your job.
One of the main benefits of a stakeholder pension is the flexibility allowed when it comes to contributing and transferring pensions.
For that reason, stakeholder pensions must meet government standards that ensure low minimum contributions, free transfers of money between pensions, flexible contributions , and a default investment fund. So, to find the best stakeholder pension for you, you’ll need to shop around.
Stakeholder pensions are particularly good for those who are self-employed or on a low income.
So, it’s a good idea to look for a pension provider that lets you contribute a smaller amount to your pension, allows you to freeze and re-activate your contributions when it suits, and offers you a wide range of choice about what your pension is invested into.
Also make sure to keep a close eye on any annual charges, although these are typically low.
Some workplaces will automatically offer you a stakeholder pension, in which case your employer will have already decided which pension provider to use.
Your employer may also arrange contributions to be made from your wage or salary.
If your stakeholder pension is the only pension offered by your employer, you will be automatically enrolled and will have to opt out of paying your contributions if you don’t want to continue paying.
You can also choose to set up a stakeholder pension as a personal pension for yourself, however it is worth remembering that any pension you set up has to meet government standards to ensure they are good value.