Stakeholder pension plans can be flexible ways for U.K. residents to save for retirement. They can be set up by an employer or by the individual, before being used as retirement income. While the benefits of these types of pension plans include low minimum contribution requirements and no penalties if contributions cease, these types of retirement plans have many disadvantages when compared to more traditional pension plans.
One of the major disadvantages of stakeholder pension plans is that you cannot access them until you reach age 55. This is different from most personal pension plans, in which you can pay a high tax, but still use the funds before retirement if you have an emergency or financial crisis. Some stakeholder pension plans have stipulations that you can only access them between ages 55 and 75, as well. This may not benefit someone who doesn’t retire before age 75.
Compared to personal pensions, stakeholder pension plans often have limited choices when it comes to investing. For example, if you set it up initially to be divided between different stocks and shares, you may not be able to change the portfolio if one of your original investments begins to lose value. Also, you will typically face investment restrictions, which means that you may not be able to move your money into more lucrative investments if the market changes.
Most stakeholder pension plans feature an annual management charge that changes from year to year. In some plans, the charges are based on a set percentage, and the percentage decreases as your pension funds increase. However, this means that you’ll be paying higher charges when you first open the pension plan.
Stakeholder pension plans are set up so that you make your investments before you retire. If you make wise choices, or are lucky, you’ll have a lucrative pension plan to live on in your retirement. However, if you make poor choices or the market goes down, then you may not have much to live on in retirement. Also, in many stakeholder plans, your returns are not only based on the stock value at your retirement, but also on interest rates and the overall investment performance that occurs between when you first set up the plan and your actual retirement date. This carries risks that many people cannot afford to take.
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