Stakeholder pension vs personal pension

Opening and contributing to a pension scheme is one of the best ways to save for retirement. If you have a workplace scheme then that’s often the best place to start as you’ll get free contributions from your employer. If you’re self-employed or looking for a separate pension, then it’s worth considering opening a stakeholder pension or a personal pension.

In this guide we explain some key details around the difference between stakeholder pension and personal pension schemes. We also take a look at common questions like “can I transfer from a stakeholder or personal pension?” and “what happens to my stakeholder pension when I retire?”

What is a personal pension?

A personal pension is a scheme you set up directly with a pension provider. It’s a type of defined contribution pension where you build up a pension pot over time. You can use this pension pot when you retire to buy an annuity or draw down an income.

Personal pensions are great for self employed people or employees who want to build up their own pension. They are also available to people who are unemployed or not currently working.

Key features of a personal pension

• You have a pension contract directly with the pension company
• You make contributions directly from your bank account or from your workplace PAYE if it is a workplace group personal pension.
• You can access pension savings from age 55. This is set to increase to 57 years old in 2028.
• You’re allowed to take the first 25% of your pension tax free.
• You can make gross contributions of £3,600 or 100% of your pay, whichever is higher, up to a maximum of £60,000 per year.
• If your pension pot exceeds the lifetime allowance of £1,073,100, you’ll have to pay extra tax charges.
• Your contributions are usually paid net of basic rate tax relief and tax relief of 20% is added later by HMRC.
• You can choose from a variety of investment funds within your pension scheme.

What is a stakeholder pension?

A stakeholder pension is actually a type of personal pension scheme. It’s designed to be a simple type of pension scheme with low charges and a low level of minimum contribution.

It works a bit like other personal pensions, but the pension provider has extra rules they have to follow. Here are the key features of a stakeholder pension:

• The pension provider will accept minimum contributions of as little as £20 per month.
• Pension providers won’t charge more than 1.5% in fees for the first ten years and then 1% after that.
• There are no penalties if you stop contributing or transfer the fund elsewhere.
• There is a default investment fund if you don’t want to choose where to invest.

Do they both require the same contributions?

Stakeholders pensions have a minimum contribution level of £20 per month. Other personal pensions have a minimum contribution level that is set by the pension providers. Many personal pensions have a minimum contribution level of £50 to £80.

What are the different types of personal pension?

There are lots of different types of personal pension, including the following:

• Standard personal pension – this is a defined contribution pension where you pay into a pension pot to save for retirement.
• Self Invested Personal Pension (SIPP) – this is a popular type of pension scheme with an extremely wide range of investment funds. It can be a good choice for confident and experienced investors.
• Group personal pension – some employers use a group personal pension as their workplace scheme. Although your employer also contributes to your pension pot, your contract is directly with the pension provider.
• Stakeholder pension – this is a simple type of personal pension with capped fees. It allows you to contribute as little as £20 per month.

Can I transfer from a stakeholder or personal pension?

You can transfer your pension to another provider with a stakeholder or another type of personal pension.

Stakeholder providers must allow customers to transfer their pension for free. Other personal pension providers are allowed to charge fees for pension transfer, although they often also allow free transfers.

What happens to my stakeholder pension when I retire?

You can currently withdraw your pension savings any time after the age of 55. The minimum age when you can access your private pension is going up to 57 after April 2028.

You’ll be able to take the first 25% of your pension as a tax free lump sum. After the first 25%, you can choose whether to invest your pension pot in an annuity or draw down income gradually from your pension pot.

If you’re approaching retirement you can use the government pension service, Pension Wise, for free impartial pensions guidance. Or you can book an appointment with an independent financial advisor. They’ll look at all your circumstances and advise you on your pension options.

Pros and cons

Here are some of the pros and cons of a stakeholder pension.

Bottom line

Stakeholder pensions are designed to be a simple and affordable type of pension scheme. You’ll be able to contribute as little as £20 per month and still receive tax relief on your contributions. You’ll also be entitled to free pension transfers and low management fees. You won’t have any penalties if you need to stop contributions and your savings will be invested in a default fund if you’re not sure where to invest.

Other personal pension schemes can also be a good option for if you want to have a greater choice of funds. It’s worth shopping around as there are many personal pensions with a wide choice and funds and low admin fees.

Frequently asked questions

• Will I get tax relief on my stakeholder pension?

  You will receive tax relief on your stakeholder pension. It means the government tops up your pension savings by 20%. For example, if you contribute £80 to your pension, the government will top it up to £100.

• What type of pension is a stakeholder pension?

  A stakeholder pension is a simple type of personal pension scheme where you can contribute as little as £20 per month. It is a defined contribution scheme where you build up a pension pot to use for retirement.

• What is the main difference between stakeholder and a personal pension?

  The main difference between a stakeholder pension and a personal pension is that you can contribute as little as £20 per month to a stakeholder pension. Fees are sometimes lower on a stakeholder pension, although there are also lots of other personal pensions with low fees as well.

• How do I choose the right pension?

  Choosing the right pension for you depends on your personal circumstances. If you have a workplace scheme then it usually makes sense to join it. You will get free contributions from your employers as well as receiving tax relief.

  If you are self employed, or not eligible for a workplace scheme then you could consider opening your own personal pension scheme. Have a think about what is important to you. Do you want a pension scheme with a low minimum contribution or is it important that you have a wide range of fund to choose from?

• Who can have a stakeholder pension?

  Stakeholder schemes are open to UK permanent residents or Crown Servants. Some schemes aren’t open to people over 75 years old.

• Who can have a personal pension?

  Personal pensions are open to any UK permanent residents or Crown Servants.

• Can children open a stakeholder pension?

  Children who are UK permanent residents can open a stakeholder pension. Non earners aren’t allowed to contribute more than £2,880 to a pension scheme, which will be topped up to £3,600 by HMRC.

• Can I gain more from a stakeholder scheme versus a personal pension scheme?

  Whether you will gain more from a stakeholder or personal pension scheme depends on your circumstances and your fund choices within the pension scheme. If you can only afford to contribute a small amount and you want a simple pension with limited fund choices, then a stakeholder pension may be the best option for you.

• Who will benefit more from a personal pension versus a stakeholder pension?

  Personal pensions vary significantly depending on the pension provider and the type of scheme. If you are a confident investor that wants to have a wide choice of funds, then you may prefer another type of personal pension over a stakeholder pension.