Stakeholder and personal pensions

Depending on your circumstances, you should think about contributing to:

• a stakeholder or personal pension contracted out of the additional State Pension; or
• a stakeholder or personal pension on top of the additional State Pension.

If you’re thinking of a stakeholder or personal pension, the most important question is whether it is the best arrangement for you.

Click here for a more detailed description of stakeholder pensions. If you have already joined, or are thinking of joining, a personal pension scheme, you should ask the pension provider whether it will be easy and cheap for you to transfer to a stakeholder pension (or other pension) if this is better for you. For further information, please see Stakeholder pensions – Your guide (PM8) or Personal pensions – Your guide (PM4).

Remember, if you are not sure what is the best choice for you, get further help.

How do personal pensions work?

With personal pensions, you agree to pay a regular amount or a lump sum to the pension provider, who will invest it on your behalf. When you pay into a personal pension, the Government gives you tax relief on your contributions to boost the value of your pension.

The companies that sell pensions will charge you for starting up and running your pension. This means that these companies use some of the money in your pension scheme to pay these charges. This in turn reduces the amount of money that the companies invest, and reduces the size of your final pension fund. Different pension providers can charge very different amounts – so make sure you shop around.

When you retire, you use the fund you have built up to buy a regular pension for the rest of your life (an annuity) from an insurance company. This does not have to be the same company that you have had your pension with. In some circumstances you can get part of the pension fund as a tax-free lump sum, or you can take some of the fund as income before you buy an annuity. You should shop around and compare the annuity rates that different annuity providers are offering before you decide which annuity to buy.

Finding a personal pension

You can buy a personal pension in one of three ways.

• Through a pension provider, or through a financial adviser who is ‘tied to’ (works only for) that provider. They will only be able to advise you about the personal pensions that their organisation offers.
• Through an independent financial adviser (IFA). You can get advice from an IFA about a range of personal pensions, but you will have to pay for their advice through a fee, or through commission deducted from your contributions. Commission payments reduce the amount going into your fund and the pension you eventually get.
• Directly from a pension company (for example, by phone or through the internet). If you are confident that you know enough, you may prefer to deal directly with the pension companies. There is an increased risk that you may end up buying a pension that does not suit your needs. If you are in any doubt, you should get further help.

You may have to pay for financial advice through fees or commission which are taken from your contributions. (Commission is the fee that financial advisers get for each sale they make.) Before you get financial advice, you should always ask for details of fees or commission.

What if I drop out?

Around a third of the people who buy personal pensions stop paying into them within three years. Dropping out like this can mean that you lose much of the money you’ve already paid in. Before you buy a pension you need to be sure that it is the right one for you. Find out what would happen if you could not carry on making payments, and how much it would cost if you wanted to move your money to a different scheme.

Group personal pensions

Some employers who do not run an occupational pension scheme may arrange for a pension provider to offer their employees a personal pension instead. Personal pensions arranged in this way are called ‘group personal pensions’. Charges may be lower than those of a personal pension you arrange for yourself because of the numbers of people who will be involved. Your employer may also agree to pay extra contributions on top of what you pay in. Find out if your employer has made this arrangement, and if it is suitable for you.

If you want to know more about personal pensions, please see Personal pensions – Your guide (PM4).

Stakeholder pensions

Stakeholder pensions, which are private pensions, are another way that you can save for your retirement.

Stakeholder pension schemes are low-charge pensions, meant for people who do not have access to an occupational pension or a good-value personal pension to save for their retirement. Whether a stakeholder pension is the best choice for you will depend on your particular circumstances. You might want to consider a stakeholder pension if you are a moderate earner. Stakeholder pensions may also interest you if you are a lower earner, or you do not have an income of your own but you can afford to save for a pension. If you are self-employed, a stakeholder pension could also be the best option for you.

You should compare stakeholder pensions with the other pension options available, so you can make an informed decision about which option is best for you. But remember, if your employer runs an occupational scheme, it will normally be a better deal for you than any pension you take out yourself.

If you have already joined, or you are thinking of joining, a personal pension scheme, you should ask the pension provider whether it will be easy and cheap for you to transfer to a stakeholder pension (or other pension) if this is better for you.

If you are not sure what to do for the best, you may want to get further help.

For more information about stakeholder pensions, please see Stakeholder pensions – Your guide (PM8).