What is a stakeholder pension?

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February 28, 2024

In a nutshell

A stakeholder pension is a pension that anyone can get – whether they’re employed, working part-time or self-employed. However, there could be better options out there now.

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Pensions are wonderful things that help you save for later on in life. But there are a few different types to get your head around. One of those is a stakeholder pension.

Stakeholder pensions are great as they have relatively low fees and they help you save flexibly for retirement. However, they’re a liiiiittle bit old-school and there are lots of other personal pensions like PensionBee¹ out there nowadays that are even better – we’re talking low fees, lots of flexibility, the chance for your money to grow more and handy websites and apps to help you save. Don’t worry, we’ll explain it all here!

So, what exactly is a stakeholder pension?

A stakeholder pension is a type of personal pension – that’s a pension that’s set up especially to help you save for retirement.

Like most pensions, stakeholder pensions work a bit like piggybanks (pensions that work like this are also known as defined contribution pensions). 

What is a stakeholder pension?

You pay money into it throughout your working life. Then, once you turn 55 (or 57 from 2028), you can finally access all those lovely savings you’ve built up. Oh, except they’re actually much better than a piggybank. Here’s why…

  1. Growth. Your money will grow while it’s sat in your pension, without you having to do a thing – your pension provider (the company that manages your pension) will normally take care of this for you by investing your money into companies. 
Stakeholder pension growth
  1. Tax relief. You won’t have to pay any tax on the earnings you pay into your pension, known as tax relief. That means more of your money goes into your pocket instead of the tax man’s (or tax woman’s!).
  1. Get 25% tax-free. When you eventually come to take money out of your pension, you’ll be able to get the first 25% as a tax-free lump sum! In other words, you won’t have to pay a penny of tax on a quarter of the money you take from your pension.
Stakeholder pension bonus

Stakeholder pension schemes are designed to be really accessible for everyone – they’re flexible, they have low fees and anyone can set one up. Woohoo! This makes them really popular with people who might otherwise struggle to access a pension – for example, people who work part-time, self-employed people whose income fluctuates, and even people who are unemployed (although anyone can set one up to boost their retirement income, including people with full-time jobs!).

Note: if you're looking to start your own pension check out PensionBee¹, they're 5* rated, easy to use, have low fees and a great track record of growing pensions over time. Here’s our PensionBee review to learn more.

That said, stakeholder pensions can also be set up for you by your employer. If you have an employer, the chances are they’re legally obliged to start a pension for you, known as a workplace pension – you have to contribute a percentage of your earnings each month (at least 5%), and your employer tops that up themselves (they have to add at least 3% from their own pocket). Nice! This doesn’t have to be a stakeholder pension, but it can be.

Workplace pension

If you’ve got a workplace pension, and a nice employer who will contribute more than 3% if you contribute more (so if they match your contributions), you should take advantage of this first. Contribute more into your workplace pension scheme before opening a stakeholder pension or any other personal pension – it’s basically free money!

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How are stakeholder pensions different?

Okay, remember how we said that stakeholder pensions are a type of personal pension? Well, there are actually 3 types of personal pension altogether. These are…

  • Stakeholder pensions;
  • Self-invested personal pensions (SIPPs); and simply
  • ‘Personal pensions’ (we know, it’s a bit confusing!)

We’ll explain what each type is in just a minute. But as a general rule, they’re all designed to help you grow your money over time, and they’ll all give you that lovely thing called tax relief too (kerching!). 

However, stakeholder pensions also have to follow some special rules set by the government – these rules are designed to make it easier for you to save flexibly for retirement, so they’re pretty nice! That means when you start a stakeholder pension, you know you’ll get…

  • No penalties: If you have a stakeholder pension, your pension provider won’t be allowed to charge you a penalty fee if you stop contributing to your pension or if you decide to transfer your pension fund somewhere else. So, you won’t be stuck paying into a pension if you change your mind (or get strapped for cash!) later down the line.
  • Low minimum payments: By law, you can add as little as £20 to your stakeholder pension in one go (your pension provider can’t make you pay in more!). This is good if you’re strapped for cash, but we recommend you add more if you can afford to!
  • Cap on management charges: Pension providers will normally charge you a fee for managing your pension. With stakeholder pensions, your pension provider can’t charge you more than 1.5% per year for the first 10 years, and then 1% after that (although lots of other personal pension providers will offer low fees too!).

Sounds nice right? Well, yes. However, bear in mind that even though other types of pensions don’t have to follow these rules, some of them are even better. In fact, there are lots of modern pension providers that operate fully online that are generally cheaper and better (plus, they have handy mobile apps that make it easy for you to track your savings on the go!).

Modern pension providers

Plus, even though stakeholder pensions are designed to grow like other types of pensions, they may not grow quite as much. This is because they can’t invest in as many funds (funds are when lots of people’s money is pooled together in a collection of investments, designed to help your money grow).

Investment fund

Stakeholder pension vs standard personal pension: what’s the difference?

Stakeholder pensions and standard personal pensions are really, really similar. At a glance, you’d probably struggle to tell the difference!

However, the main difference is that with a stakeholder pension, your pension provider will have to follow those extra rules set by the government. That means a stakeholder pension may have…

  • Lower annual charges: Stakeholder pensions will often have lower fees, as the government will cap how much a pension provider can charge you. However, lots of regular pension providers will also have low fees, especially online ones – for example PensionBee¹, charges between 0.50% and 0.95% depending on the plan you choose, so it will probably be even cheaper than most stakeholder pensions!
  • Lower minimum contributions: Stakeholder pension providers have to let you add as little as £20 to your pension in one go if you want to (although it’s always best to add more if you can!). Some other pension providers will require you to pay in more money at a time which might be tricky if money’s tight.
  • Narrower range of funds: Remember how we said that with all personal pensions, your money will hopefully grow while it’s sat in your pension pot? Well, with a stakeholder pension, your pension provider will often put your money in a narrower range of funds, so it might not grow as much as it would elsewhere (although this isn’t always the case!). There must also be a default option (a ‘default investment fund’) so if you don’t want to make any choices on investments, your pension savings will go into this investment option.

As you can see, stakeholder pensions can be pretty great, as you’ll know that whichever pension provider you go with, they’ll have to play by these rules – which means cheaper fees and more flexible saving for you! However, don’t forget, you can get all the benefits of a stakeholder pension (like low fees and flexible saving options) with a standard personal pension too – you’ll just need to find the right pension provider. 

On that note, PensionBee¹ definitely deserves another shoutout – not only do they offer low fees (just as low as many stakeholder pension providers), but they’ll also let you pay in as much or as little as you want, whenever you want. Oh, and they have a handy mobile app too, which lets you track your money and watch it grow while you’re out and about.

Stakeholder pension vs SIPP: what’s the difference?

‘SIPP’ stands for ‘self-invested personal pension’. It’s basically a personal pension where you choose exactly what the money in your pension pot is invested in.

Self-invested personal pension(SIPP)

This is different from stakeholder pensions (and standard personal pensions!), where your pension provider will normally choose which funds to invest your money in themselves. Yes, they’ll sometimes give you a choice. But in general, the options they give you have been carefully picked out by experts – plus, they’ll look after your investments for you so that you don’t have to worry about that side of things at all.

When you compare the two, SIPPs will normally give you…

  • More control: With a SIPP, you choose all the assets you invest in, whereas with a stakeholder pension, your pension provider will normally make most of the choices for you. This means SIPPs are better-suited to people who have lots of experience investing, whereas stakeholder pensions are good for anybody – you get to leave your money in the hands of experts who know what they’re doing and can help grow your money.
  • More hassle: A SIPP will need a lot more time and attention from you – you’ll need to check on it regularly to see how your investments are performing, and you may need to change your strategy if things aren’t going your way. With a stakeholder pension, you can just let your money grow without having to worry about it, as your pension provider will look after things for you.
  • Lower fees: Often, SIPPs will have lower fees than stakeholder pensions. This is because you’ll be looking after your pension yourself for the most part, rather than letting your pension provider take care of it for you.
  • Higher growth (maybe): You might be able to grow your money quicker with a SIPP. However, that all depends on the choices you make and how skilled you are as an investor! On the flip side, your money is more certain to grow with a stakeholder pension, as experts will be looking after it and they’ll be investing it in assets that they feel confident are going to grow.

Ultimately, we’d only ever recommend SIPPs to people who have a lot of experience investing. But if that sounds like you, here's the best self-invested personal pensions.

However, if you’re not an investment pro, it’s probably going to be safest to let the experts look after your pension for you. After all, you’ve carefully stashed all that cash away ready for retirement, so you want it to be looked after properly! Whether you opt for a stakeholder pension or a standard personal pension, these will allow you to sit back, relax and watch your money grow ready for your sunset years!

How to start a stakeholder pension

Decided that a stakeholder pension is the one for you? Then there’s no time to waste! The earlier you start a pension and start saving, the more chance your money will have to grow ready for when you eventually retire!

Luckily, starting a stakeholder pension is easy – just follow these simple steps.

Starting a stakeholder pension

1. Find a pension provider

First things first, you’ll need to choose a pension provider. Every pension provider is different, so it’s worth spending some time comparing what’s out there – they’ll all have different fees and they may have different rules about things like minimum contributions too. However, if you’ve opted for a stakeholder pension, at least you’ll know that they’ll all have relatively low fees and flexible contribution options, inline with those government rules!

It’s worth noting that there aren’t actually that many providers offering stakeholder pensions. The most popular are insurance providers like Standard Life and Aviva.

Alternatively, if you can’t find a stakeholder pension provider that you love, consider using a personal pension provider that happens to have low fees and flexible contribution options. For instance, PensionBee’s¹ fees are less than 1% and they’ll never charge you a penalty for pausing contributions. Plus, you can pay in as much or as little as you want (and they have a handy mobile app you can use to watch your money grow too!).

Another great pension providers is MoneyFarm¹. This is a great choice if you want low fees as well as actual financial advice from a human – they’ll assign you your very own personal investment advisor who can advise you on the best pension plan for you! Oh and they can help you with lots of other types of savings accounts too, like ISAs, so you’ll be able to track them all in one place. Here's our MoneyFarm review.

2. Pick a plan

Now that you’ve chosen a pension provider, you’ll just need to go ahead and pick a pension plan – this basically just outlines how your money will be looked after, what fees you’ll pay and what funds your money will be invested in. Most pension providers will have a few options!

Don’t worry, your pension provider will make it easy to pick a plan – normally, it’ll be to do with how old you are and how long there is before you retire. 

But some pension providers, like PensionBee¹, will have more jazzy options too – like funds that only invest in ethical or socially responsible companies. These are great if you want to feel like you’re saving the world at the same time as saving for retirement. Obviously, we’re a big fan!

Ethical investing

3. Start saving!

Finally, you just need to start saving into your new pension! Congrats!

Some pension providers will ask you to pay a certain amount into your pension to start with, but a stakeholder pension will never make you add more than £20. And anyway, many pension providers will just let you pay in as much or as little as you want, without restricting you at all.

Of course, the more you can save into your pension, the more financially secure you’ll be later on in life. But it’s important not to overstretch yourself either. Stakeholder pensions are designed especially so that you don’t lose out if you have to pause contributions for one reason or another – so they’re perfect if you’re looking for a flexible option that will let you save in the way that’s best for you!

How much can you pay into a stakeholder pension?

Keen to get saving? It’s a good idea to save as much as you can into a personal pension, however there are limits! And these apply to all private pensions – so stakeholder pensions included.

First, you can’t save more than your total annual income within a tax year (April 6th to April 5th the following year), or more than £60,000, whichever is lower. This is called your annual allowance.

Stakeholder pension annual allowance

What happens when you retire

When you want to retire and start spending your savings – you’ll first have to wait until you’re 55 (57 from 2028), although ideally hold out until you fully retire as your money will keep growing while it’s invested within the pension fund.

When you do want to take the cash from your stakeholder pension, you can first take 25% of it completely tax free. So that’s no Income Tax to pay at all. You can take this as a tax free lump sum, or, you can take it as a regular income, and the first 25% of each payment will be tax free. You’ll pay Income Tax on the rest if your annual income is above your Personal Allowance of £12,570. Just like a job now. There’s no difference with pensions.

Accessing your stakeholder pension

Taking your cash from your pension is called ‘drawdown’, but you can also buy an annuity with your pension funds. This will give you a set income for the rest of your life (or for a set number of years).

Stakeholder pensions have the same retirement benefits as all other private pensions (defined contribution pensions). The only difference is how you save, such as the lower minimum contributions and lower fees.

Ready to start a pension?

Retirement may well feel like a long way off right now, but it’ll come round sooner than you think! And the earlier you start saving, the more you’ll thank yourself later.

Starting a stakeholder pension can be a great option as it will guarantee your pension provider will treat you nicely – in other words, you’ll get low fees, low minimum contributions and no penalties for pausing contributions as standard.

But don’t fall into the trap of thinking these are the only pensions that come with these benefits!

Lots of standard personal pension providers, especially more modern companies that are fully online, will also give you these things and more – even though the government doesn’t require them to. So, do your research before discounting them.

Our favourites are PensionBee¹ and MoneyFarm¹, which both have lovely low fees. PensionBee is great if you want good customer service and an amazing app that lets you watch your pension grow wherever you are. And Moneyfarm is for you if you’re after bespoke financial advice without the hefty fees that sometimes go with it – as well as being able to set up multiple different types of savings accounts in one place!

Whatever you choose, one thing’s certain – by starting a pension (and saving into it regularly), you’re setting yourself up for a lovely life in your golden years. Cruises around the Caribbean, anyone?!

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Find the best personal pension for you – you could be £1,000s better off.

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Best personal pensions

Find the best personal pension for you – you could be £1,000s better off.

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Best personal pensions

Find the best personal pension for you – you could be £1,000s better off.

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This article was written by the team at Nuts About Money, and fact-checked by 2 independent reviewers. You’re in safe hands.

Best personal pensions

Find the best personal pension for you – you could be £1,000s better off.

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