A Guide to Stakeholder Pensions

Stakeholder pensions were launched in 2001 with a clear goal: to provide a simple, low-cost, and flexible pension for everyone, especially those on moderate incomes or the self-employed, who were often left out.

Many people have a stakeholder pension from an old job or from a time before auto-enrolment. But with the rise of modern, low-cost SIPPs and workplace schemes, are they still a good deal?

Here, we'll cover what a stakeholder pension is, its specific rules, and how an independent financial adviser can help you review an old one - or decide if it's the right choice for you today.

What is a stakeholder pension?

A stakeholder pension is a type of defined contribution (DC) 'pension pot'. Like any other DC pension, the money you pay in is invested, and the amount you get in retirement depends on how much has been contributed and how the investments have performed.

The key difference is that a stakeholder pension is a "regulated" product. It must meet a specific set of government rules designed to protect the consumer, making them a simple and (at the time) revolutionary option.

The 5 key rules that make a stakeholder pension unique

To be called a "stakeholder pension," a plan must, by law, meet these minimum standards:

1. Capped Charges: This is the most famous rule. For plans started after 2001 (and before 2005), charges are capped at 1.5% of the pot's value per year for the first 10 years, and 1% thereafter. For newer schemes, the cap is often a flat 1.5%.

2. No Fees for Transferring: The provider cannot charge you an exit fee if you decide to transfer your pot to another pension scheme. This makes them very easy to move.

3. Low and Flexible Contributions: You can start a stakeholder pension with a minimum contribution of £20 and stop, start, or change your payments at any time without any penalties.

4. A Simple "Default" Investment Fund: All stakeholder schemes must offer a default investment fund for people who don't want to make their own investment choices.

5. Run by Independent Trustees: The scheme must be overseen by trustees or an independent governance committee to ensure it is run in the members' best interests.

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Who has a stakeholder pension (and are they still relevant)?

Stakeholder pensions were a vital stepping stone between the old, expensive personal pensions of the 90s and the arrival of auto-enrolment in 2012.

Who has one?

• People with old workplace pensions: Before auto-enrolment, many employers used stakeholder pensions as their company scheme. If you had a job between 2001 and 2012, you may have one of these.

• Self-employed people: They were (and still are) a simple, "off-the-shelf" option for sole traders who needed to start a pension themselves.

Are they still relevant? This is the key question. When stakeholder pensions were launched, a 1.5% charge cap was incredibly low. Today, the pension market is far more competitive.

Modern workplace schemes (used for auto-enrolment) have a charge cap of 0.75%, and many personal pensions or SIPPs have charges well below 1%. This means that while stakeholder pensions are simple, they are often no longer the cheapest or best option.

How our independent pension advisers can help

Given their age and the way the market has changed, the most common service we provide for stakeholder pensions is a full, independent review.

Many people are paying 1% or 1.5% in a stakeholder pension with limited fund choices, when they could be paying 0.5% in a modern plan with thousands of options. Our job is to analyse if you'd be better off moving.

Here's how our advisers can help:

1. Reviewing Your Old Stakeholder Pension

This is the most common and valuable service. You have a statement for a stakeholder plan; you don't know what to do with it. We will:

• Analyse the charges: We'll confirm the exact charges you are paying and compare them to the wider market.

• Review the funds: Stakeholder investment choice is notoriously limited. We'll analyse the performance of your funds and see if they are still suitable for your goals.

• Provide a clear comparison: We will show you, in plain English, what your pot is worth, what it's costing you, and how that compares to a modern alternative.

You can read more about what a pension review entails in our standalone guide to them.

2. Advising on Consolidation

Because stakeholder pensions have no exit fees, they are prime candidates for consolidation. An adviser will:

• Check for any hidden benefits: While rare, we will always do a final check to ensure there are no other guarantees (like a Guaranteed Annuity Rate) attached to the plan before recommending a transfer.

• Recommend the right "new home": We can advise whether you'd be better off moving your stakeholder pot into your current workplace pension (to keep things simple) or into a new SIPP or personal pension (to give you more control and investment choice).

• Manage the transfer: If you decide to move, we can handle all the paperwork for you.

3. Advising the Self-Employed

If you are self-employed and considering a stakeholder pension, we can:

• Compare your options: We will sit down and compare a stakeholder plan, a standard personal pension, and a SIPP. A stakeholder is simple, but a SIPP with an adviser's help can be more tailored to your specific investment goals.

• Set up the right plan: We will help you start the right pension for your specific needs, balancing simplicity, cost, and investment choice.

Ready to take advantage of a free pension review and a no-obligation chat with an independent financial adviser who specialises in stakeholder pensions? Get started here.