stakeholder pensions

You can stop and start contributions as you wish (without any penalties). Even if you are no longer employed, you can continue contributing to a Stakeholder Pension (up to £3,600 per annum).

What if I fall ill?

You should be able to buy a 'waiver of contribution' contract (subject to the conditions of your selected provider).

If you choose to do this, then if you can no longer contribute due to illness, your contributions will be paid on your behalf by your selected provider.

How soon should I invest in a stakeholder?

You should start investing in a pension as soon as possible. The sooner you start to save the greater your retirement benefits are likely to be.

If you don't have access to a company pension scheme, you should consider taking out a Personal Pension. As a general rule, these are more expensive than Stakeholder Pensions, but there are good reasons for this, such as the range of investment choice Personal Pensions offer.

As a result of the stakeholder scheme, a number of providers now offer competitively priced Personal Pensions. These can be switched into a stakeholder pension without penalties and without any new set-up charges.

WHo offers stakeholder plans?

Not all pension companies offer stakeholder plans, as some don't want to or feel they are unable, to cut their charges to the stakeholder level.

The stakeholder guidelines on how pensions can invest may not suit all savers either, so personal pensions and company pensions live on alongside stakeholder schemes.

How do stakeholder plans differ from personal pensions?

Stakeholders have to meet minimum standards and employers have to provide access to a Stakeholder Pension unless they already provide a pension scheme that meets certain criteria laid down by the Government.

The State pension

What sort of pension benefits can I expect from the State when I retire?

It depends on when you actually retire. Under the present system there are two levels of state pension benefit, the Basic State Pension which is not means tested and rises in line with prices; and the State Earnings Related Pension Scheme (SERPS), which is paid to people who were employed and who paid National Insurance contributions.

What is SERPS?

SERPS was introduced in 1978 as a compulsory earnings-related component of the State retirement pension for people who have worked as employees and have paid Class 1 National Insurance Contributions (NICs). It does not apply to the self-employed unless they have at some stage paid Class 1 NICs.

The amount paid out through SERPS depends on the level of earnings and the maximum payable to someone retiring today is £120 a week. About 5.5 million people currently receive SERPS and the average payment for those reaching State pension age is £20 a week for men and £11 a week for women.

It is possible for people to 'contract-out' of SERPS into a private Personal Pension. People who do this receive a rebate of their National Insurance contributions, and the size of this depends on their age.

People who earn less than £100 a week (the primary threshold, or lower earnings limit) do not pay National Insurance contributions and are not entitled to either the Basic State Pension or to SERPS.

They depend on what is called the Minimum Income Guarantee in retirement.

Under the new system, the Basic State Pension remains and SERPS is replaced by the State Second Pension (S2P).

S2P gives employees earning up to £26,600 a better pension than Serps, whether or not they are contracted out into a private pension, with most help going to those on the lowest earnings (up to £11,600).

S2P is aimed at people earning between the lower earnings limit of £100 a week and £9,500 a year as well as such people as carers and the disabled who cannot provide for themselves.

Official figures show that a man who earned £6,000 a year starting work at 16 and retiring at 65 would get £59 a week from the S2P, as well as his state pension. This is £46-a-week more than he would have received under Serps. What benefits can I expect from a Stakeholder pension?

This depends on when you start contributing, how much you pay in and how much your investments grow. One thing to bear in mind is that there can be quite a considerable cost associated with delaying a decision to start saving. It is impossible to know the level of benefits you will receive, because this will depend on future investment growth.

When you retire, you can have up to 25 per cent of your accumulated Stakeholder Pension fund as tax-free cash. You must then use the balance to buy some form of pension annuity (income for life), which will be taxed at your highest rate of Income Tax.

When will I be able to enjoy the benefits of a Stakeholder Pension?

At any age between 50 and 75, irrespective of whether or not you are still working.

The benefits will largely depend on the size of your pension fund when you come to retire. This in turn will depend on the contributions you have made over time and the investment performance of these contributions.

Will a Stakeholder Pension provide any benefits for my spouse if I die?

If you die before you retire, then the situation is likely to be similar to a Personal Pension where the value of the pension fund on the death of the policyholder would be returned.

There may also be options - as with Personal Pensions - to buy life cover and disability benefits. Post-retirement, it is likely that you'll buy an annuity (pension income) with your pension fund, and here there are options to buy annuities which provide spouse's and dependants pensions.

Are Stakeholder Pensions tax effective?

They are treated in the same way as existing Personal Pension Plans.

Your contributions attract tax relief at your highest rate of income tax. From 6th April 2000, for basic rate taxpayers, this means that of every £100 invested in your plan, the Government will pay £22 (so you only have to pay £78), while for higher rate taxpayers, the Government pays £40 of every £100 contribution - leaving you to pay £60.

Currently, employees and self-employed people face a different situation when it comes to actually getting the tax relief on their contributions, and the Government is proposing to simplify the situation so that both sets of people are treated in the same way.

The tax efficiency doesn't end here! Once your money is invested inside the Personal Pension, it continues to grow free of most UK taxes, though UK dividends will be subject to corporation tax.

When you come to retire (any age between 50 and 75), you can take up to 25% of your total accumulated pension fund as a tax-free lump sum. However, the balance must be used to buy an income for life, or what is called an 'annuity'. This income will be taxed at your highest rate of Income Tax.

You should note that the current tax situation could change in the future.

Can my employer contribute to a Stakeholder Pension?

That is up to the employer. The only obligation on the employer is to provide access to a Stakeholder Pension, and to make it possible for contributions to be deducted from the payroll and paid directly to the pension provider.

If I change jobs will I have to leave the Stakeholder Pension offered by my current employer?

The fund of money you build up in your Stakeholder Pension will be portable, so you can be able to take it with you.