Stakeholder Pensions were introduced in April 2001 and share the same tax advantages as Personal Pensions but contain some specific rules laid down by the Government to ensure that they offer good value particularly for the lower paid.
The main rules are:
A stakeholder pension allows investors to make contributions of up to £3,600 gross per annum without reference to earnings, or up to 100% of earnings, but subject to the annual allowance, currently £40,000.
The advantage of stakeholder pensions are their relative simplicity, low and capped charges and their availability to almost anyone wanting to establish a pension for either themselves a family member (e.g. a child) or an employee.
Contributions into a stakeholder pension benefit from an HMRC top-up/rebate of £20 on each £100 paid in by basic taxpayers and £40 or £45 for higher and additional rate taxpayers (reclaimable via a tax return) making these vehicles one of the most tax efficient savings schemes in the UK.
Contributions may be by lump sum or regular payments, paid by the individual, someone on their behalf, or their employer up to their permitted maximum allowance. Employer contributions do not attract National Insurance and qualify for Corporation Tax Relief.
There’s a limit to the amount that can be invested in pension plans every year before an individual is taxed on the contributions. It’s set by the Government and it’s called the ‘Annual Allowance’
The current annual allowance is £40,000 pa.
If you are close to contributing up to the allowable limit it would be wise to seek advice from Rosan Helmsley to ensure the limit isn’t breached, which otherwise may trigger a tax charge. Also due to the way contributions are paid to pensions it is important to check the ‘Pension Input Period’ (PIP) to ensure contributions are maximised and allocated in the most tax efficient way.
The ‘Lifetime Allowance’ (LTA) is the total value of all tax-privileged pension savings held under all registered pension schemes, to which an individual is entitled. The lifetime allowance is currently £1.03 million (2018/19 tax year), which has reduced from a high of £1.8m in the 2011/12 tax year (see table below). Accumulated pension benefits above the lifetime allowance are subject to a tax charge, even if the excess has resulted from good investment performance, unless you have previously applied for one of the protection options. The excess amount is subject to tax at 55% if the excess is drawn as a lump sum or 25% if the excess is used to provide additional retirement income.
Stakeholder pensions, whilst useful for many, have certain limitations most notably on the permitted range of underlying investments, which limits their flexibility particularly for those with higher amounts to invest or those wanting to invest in a wider range of investment funds. Investors with these requirements should consider either a Personal Pension or SIPP.