Personal and Stakeholder Pensions

July 2003

In a recent press release the Occupational Pensions Regulatory Authority (Opra) has confirmed that over the next twelve months they will be sending out surveys to employers to see if they are breaking the law.

Any Employer with five employees or more must offer their employees the opportunity to join a designated stakeholder pension scheme or an alternative appropriate pension scheme and if these schemes are not in place, Opra has the power to fine employers up to £50,000.

Employers still have time to designate a stakeholder pension scheme and Opra have a website dedicated to employers who need further information together with a list of all registered stakeholder pension schemes. This is available at http://www.stakeholder.opra.gov.uk/. This information is also available by calling the Opra help desk on 01273 627600.

Stakeholder pensions launched in April 2001 offer very similar benefits to today's personal pensions. You can draw retirement benefits at any time between your 50th and 75th birthdays, and the maximum tax-free cash available when you take benefits will normally be a quarter of the value of your stakeholder pension fund.

The balance of your fund after taking any tax-free lump sum has to be used to provide an income. This may be through the purchase of an annuity or by drawing income directly from the fund.

If you use the drawdown approach, you must still buy an annuity by the time you reach the age of 75.

The stakeholder pension rules for contributions (which will also apply to personal pensions from 6th April 2001) mark a significant reform:

You will generally be eligible to make contributions to a stakeholder pension if you are not a member of an employer's occupational pension scheme. A major change is that you need not have earnings to justify contributions of up to £3,600. So children, students and pensioners will be able to contribute. Otherwise the current age related personal pension limits remain. They range from 17.5% of earnings up to age 35 and as much as 40% for those aged 61 or over.

All personal contributions will be made net of basic rate tax relief whether you are employed or self-employed. Even if you are a non-taxpayer or a 10% taxpayer, you will still receive basic rate relief.

If your earnings cease, you will be able to contribute to a stakeholder pension at a level of up to £3,600 per year and possibly more.

Contributions to buy life cover for plans started on or after 6th April 2001 cannot exceed 10% of total stakeholder pension contributions. The current rule, which places a limit of 5% of earnings, is much more generous and will continue to apply to arrangements in force at 5th April 2001.

You will be able to make contributions up until 31st January following the end of the tax year and have them treated as if they had been made during that previous tax year.

As a general rule, stakeholder pensions will be significantly less expensive than personal pensions. The maximum annual charge will be 1%, and there will be no other charges.

In return for these new rules on continuing contributions, the carry forward of unused pension relief will not apply after 5th April 2001. If you were planning to make "catch-up" contributions as you neared retirement, you will need to review your strategy now as a matter of urgency.