1. WHAT IS THIS NEW SORT OF PENSION?
The Government has decided that it wants to make pensions more widely available and cheaper. So a new sort of pension begins on April 6 called a ‘stakeholder’. These pensions should be easier to understand, have much lower charges, and be available to just about everyone who is not already paying into a good pension scheme.
2. HOW DO I FIND OUT IF I ALREADY HAVE A PENSION?
If you work for an employer then ask if there is a pension scheme. If there is, then normally you should join that – stakeholder will not be better. But you can pay up to £3600 (including tax relief) into a stakeholder pension on top of your company scheme as long as you earn less than £30,000.
3. WHAT IF I START EARNING MORE THAN THAT?
Don’t worry. You can still contribute to a stakeholder as long as you earned £30,000 or less in one of the past five years (you can’t count years before 2000/01).
4. WHAT IF I DON’T ALREADY HAVE A PENSION?
Then stakeholder is probably for you – whether you are employed or self-employed. You can put in as little as £20 a month – though you should put in a lot more than that to get a decent pension later in life. If you can afford it, you can put in as much as 17.5% of your earnings (more if you are over 35). The money comes out of your income AFTER tax has been deducted. However, the Government then pays the basic rate tax into the fund. So if you put in £78, it is topped up by another £22 making £100 altogether. And if you pay higher rate tax you can claim back another £18 – either through your pay packet or when you fill in your self-assessment tax form. If you are employed, your boss may also put some money in within those limits. The money you put in is invested and builds up into a fund that you own. Normally, it will be in a wide cross-section of shares that tracks the movement of the whole stock-market.
5. WITH THE STOCK-MARKET DOING SO BADLY OVER THE LAST YEAR IS THAT A GOOD IDEA?
Over the last 100 years the stock market has been the best place for your money in the long-term – say ten years or more. In any one year – like 2000 – it may go down, but in the long-term it has always risen.
6. WHAT WILL I BE CHARGED?
Stakeholder pensions cannot charge you more than 1% of the value of that fund each year to look after it for you. Some will charge less, and some will reduce the percentage as the fund gets bigger. Some other charges will be allowed – but only for specific things like giving you advice or splitting a pension on divorce. There must be no charge for moving your pension to another provider or for reducing or increasing your payments.
7. WHAT IF I HAVE A BABY OR LOSE MY JOB?
You can stop paying in at any time for any reason without a penalty. Or, if you or your partner can afford it, you can pay in up to £2808 a year even if you are not in work. And if you have a baby, you can pay into a stakeholder for her (or him) as well. There are no age limits and the Government still tops it up with the equivalent of the tax relief – even if you don’t pay tax. So if you pay the maximum, you get £3600 a year going into the fund. It is a new way to save for a child’s future – and they can’t get their hands on it until they reach 50.
8. DO I HAVE TO WAIT THAT LONG TOO?
Yes. You can choose to retire at any age between 50 and 75 – until then the money cannot be used by you. When you decide to retire you will be able to use the money in your fund to buy what is called an annuity – an income for life from an insurance company. And you can take up to a quarter of the fund as a tax-free lump-sum.
9. WHO SHOULD NOT HAVE ONE?
If you earn less than £10,000 it is probably better to rely on the SERPS – which will be renamed State Second Pension and improved for low earners from April 2002. And if you pay into a good company scheme then stakeholder is not for you. But almost everyone else could find it the best way to save for their retirement.
10. WHERE DO I GET A STAKEHOLDER?
Two places. First, if you are an employee your employer will be able to offer you one from April 6 – and from October they will normally HAVE to offer you one. Second, you can go to a life insurance company or an organisation such as a union and buy a stakeholder directly from them.
Webwatch
www.opas.org.uk 0845 601 2923
www.inlandrevenue.gov.uk/stakepension/index.htm 0115 974 1777
7 April 2001
e-mail Paul Lewis on paul@paullewis.co.uk