Pensions and Stakeholder Pension

The world of pensions is a very complicated one and an-ever changing one. There are many types of pension schemes available, all of which have their own rules and regulations. Below are some different pension schemes:-

Section 226 pension plans

Personal Pension plan (Employed)

Personal Pension plan (Self Employed)

Group Personal Pension Plans (GPP's)

Executive Pension Plans (EPP's)

Stakeholder Pensions

Self Invested Pension Plan's (SIPP's)

Self Administered Pension Schemes

Defined Benefits

Money Purchase Pension Plans

Contracting In

Contracting Out

Additional Voluntary Contributions (AVC's)

Free Standing (AVC's)

Also there are different ways in which you may take the benefits at retirement. These are:-

Annuities

Temporary Annuities

Drawdown

Phased Retirement

With all financial planning but particularly with regards pension planning it is important to get it right, failing to get the best advice could cost you thousands. Did you know for example that if you are coming up to retirement age you don't necessarily have to take the annuity (pension) that is being offered to you? Indeed you are often better off by letting us get you a better deal.

You will see from the list above how complicated pension planning can be.

In more recent times the Stakeholder pension has been introduced and below are some of the main features of it.

Let the experts guide through the maze and give you direction.

Stakeholder Pensions

Contents:-

Background to the changes

Changes to state pensions

Introducing the stakeholder pension

The role of the employer

Stakeholder pension benefits

Background to the changes

The two main aims to the pension reforms was:-
To provide better state pensions for those who cannot afford to save for their own retirement.
To encourage saving for retirement by people who can afford it. For the first time, employers are required to offer their employees access to some form of pension arrangement. This requirement will apply to employers who have five or more employees and will mean that many employers who already offer pension arrangements may have to make changes to their existing schemes.

Changes to State Pensions

Although the basic state pension is not affected the State Earnings Related Pension (SERPS), which has been in place since 1978, has been replaced by a new state pension, called the State Second Pension (S2P). S2P was introduced in April 2002 and initially will be an earnings-related benefit. Longer term, the benefits from S2P will be flat rate, but probably not for at least four years. For many employees, the maximum benefits from S2P will be higher than the pension currently available from SERPS, and the biggest increases will go to those on relatively low earnings. For example, for people who earn £10,500 a year, the benefits from S2P will be twice what they would otherwise have received from SERPS. The relative advantage of S2P over SERPs becomes smaller for higher incomes and at earnings of £23,700 and above, S2P benefits are the same as SERPS benefits.

Introducing the stakeholder pension

The big change to private pensions was the introduction of the  stakeholder pension. It is now possible to register a stakeholder pension scheme and contributions can be made into a stakeholder scheme, this commenced in April 2001. Personal pensions and occupational pensions will continue to be available, but the addition of the new stakeholder pensions has had an impact on many existing schemes. A stakeholder pension may be set up either on a trust basis or on a contract basis, with a stakeholder manager.

Trust or Contract Basis

If the stakeholder is set up as a trust, trustees must be appointed and will have to carry out their duties in much the same way as the trustees of an occupational pension scheme. Some employers may wish to set up their own stakeholder schemes under trust, but if they do, they will have to take on the duties and requirements of trustees. Alternatively, a stakeholder scheme can be set up on a contract basis by a stakeholder manager. This is very similar to the legal basis of personal pensions and most existing personal pension providers will want to set up stakeholder schemes in this way.

Minimum standards
Stakeholder pension schemes must meet certain minimum standards laid down by the DSS. The most important of these are:
A stakeholder pension can only make a single charge. The annual charge must be based on the value of the member's fund and can never be more than 1% of the value of that fund.
The minimum contribution cannot be set any higher than £20 and members may stop, start or vary contributions whenever they like without any penalty.
If a member chooses to move to another pension arrangement, the stakeholder plan is not allowed to impose any financial penalties on the transfer. Schemes that do not meet these standards can continue to be sold, but they cannot be described as stakeholder schemes.

The role of the employer

All employers have to offer their employees access to a stakeholder pension scheme unless they offer a suitable alternative pension arrangement. Those employers with fewer than five employees will be exempt from the requirement to offer access to a stakeholder pension, although they may offer access if they wish. Employers with at least five employees must offer access to a stakeholder pension to their 'relevant' employees. Any employee who is not a member of an occupational pension scheme. Directors should be included in the total number of employees, if they count as employees for other purposes. Part-time employees must also be included in the number of total employees. The employer has to offer access to the stakeholder scheme to all relevant employees within three months of their joining service. Employers need only provide employees with access to a stakeholder pension. They do not have to make contributions to the scheme. But they may make contributions if they wish and any contributions they do make will attract corporation tax (or income tax) relief. An employer who already offers either an occupational scheme or a group personal pension may be exempt if the arrangement meets certain criteria. It is the employer who is exempt and not the scheme. The Occupational Pensions Regulatory Authority (OPRA) will have responsibility to monitor the set-up and conduct of stakeholder schemes. If employers or scheme providers do not comply with the regulations, OPRA has the power to levy penalties, which can include significant fines for individuals and companies.

Stakeholder pension benefits

Stakeholder pensions will be a variety of personal pension and their benefit structure will be the same.
Benefits can be taken at any age between 50 and 75. The exception to this rule is that any benefits arising from contracted-out contributions cannot be taken before age 60. Members do not actually have to retire from work to take their benefits. If they want, they are allowed to take their benefits in stages.

Up to a quarter of the stakeholder pension fund can be drawn as a tax-free cash sum. There is no monetary ceiling on the tax-free cash sum allowed, but members cannot take as a tax-free cash sum any benefits arising from contracted-out contributions.

The balance of the fund left after taking the tax-free cash sum must be used to provide an income. That means either buying an annuity or drawing an income directly from the fund. At present, members have to buy an annuity by age 75 at the latest.

If a member dies before taking retirement benefits, the value of the fund is normally payable as a lump sum free of inheritance tax.  

Occupational schemes and the new rules

Employers who have occupational pension schemes where the benefits are linked to employees' final salaries may also have to make changes to their schemes to meet the various exemption criteria. This could be a good opportunity for a radical review of pension arrangements. One option might be to switch to a money purchase scheme, where the benefits are based on the level of funds built up in each individual's pension.