Choose the right pension scheme

Choosing a stakeholder pension scheme

The main advantages of stakeholder schemes - a type of personal pension with minimum standards set down in law - are that management charges are capped, they are easy to understand, flexible in terms of payments and, as with personal pensions, employees can continue to contribute to them if they change jobs.

The annual management charge is now capped at 1.5 per cent a year (formerly 1 per cent a year). For stakeholder plans set up before April 2005, the 1 per cent cap remains. For plans set up since then, the 1.5 per cent cap must reduce to 1 per cent (or less) after the first ten years of membership.

Employers with five or more members of staff who offer no other qualifying pension scheme have to offer employees access to a stakeholder pension. See our guide on how to know your legal obligations on pensions for an explanation of what defines a stakeholder pension plan.

If you have only four employees and later take on a fifth, you must provide all of your relevant employees with access to a stakeholder scheme. You must do this within three months of the fifth employee joining the business. Stakeholder schemes are widely available from pension providers, banks and financial services companies.

Employees' contributions to stakeholder pensions get tax relief, which is paid by HM Revenue & Customs into the pension fund. Stakeholder pensions are also tax-efficient for employers. The payments you make get tax relief as a business expense and don't attract National Insurance contributions (NICs).

In addition, if an employee contracts out of the State Second Pension (formerly SERPS), in favour of either a stakeholder pension or personal pension, HM Revenue & Customs pays a rebate of NICs, plus income tax relief on the employee's share of the rebate, directly into the employee's pension fund.

When choosing a stakeholder scheme, consult your employees on the proposed choice and look for:

• a provider that is registered with the pensions regulator (formerly the Occupational Pensions Regulatory Authority)
• a well-established and reputable pension provider, but remember that past performance is no indication of future returns
• a scheme that does not have unacceptable restrictions - some limit membership to certain trades and professions or have other restrictions

See the register of stakeholder pension schemes at the pensions regulator website.

Subjects covered in this guide

• Introduction
• Benefits of having a workplace-based pension scheme
• Choosing an occupational pension scheme
• Choosing a group personal pension
• Choosing a stakeholder pension scheme
• Approved pension schemes for directors and owners
• Unapproved pension schemes for directors and owners
• Comparison of pension schemes
• Organisations that advise on pensions schemes
• Considerations when choosing a pension scheme
• Here's how I selected the best company pension scheme for my business

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