If you’re in the market for a personal pension, there does seem to be a bewildering amount of different plans to choose from and weighing up cost and complexity against potential returns can be tricky.
Baffled by pension plans? Our guide takes you through the pros and cons of SIPPs and stakeholder pensions
Here, we take a look at the pros and cons of simple stakeholder pension schemes and more complex Self Invested Personal Pensions (SIPPs).
Stakeholder pensionsStakeholder pensions were introduced in 2001 as a simple pension option which incorporates a set of minimum standards laid down by the government.
These standards are designed to make this type of pension simple, cheap and accessible for those on lower incomes.
As with most other types of defined contribution pension, the money can be drawn from age 55 onwards with a tax-free lump sum of up to 25 per cent taken straight away and the remainder used to buy an annuity.
Anyone aged under 75 can pay into a stakeholder pension and you can invest up to £3,600 each year.
Pros and cons
Tax relief
You receive tax relief on your contributions, even if you don't pay tax. Tax relief is set at 20p in the pound for basic rate and non-taxpayers. This is collected and added to your savings by your pension company.
The tax relief forms part of your annual limit so you can pay in £2,880 a year, or £240 a month which is topped up to £3,600. Higher rate taxpayers can claim extra tax relief via their self-assessment forms.
Anyone can pay in on your behalf
Money can be paid straight into a stakeholder pension by someone else on your behalf.
For example, parents or grandparents could save into a pension scheme for their children or grandchildren – a great way to ensure your child has some pension savings for when they reach retirement, or husbands can make payments for wives who are at home with the children. [How to make your grandchild a pension millionaire]
Low charges
Unlike other personal pension plans, stakeholder pensions are designed to incorporate a minimum set of standards laid down by the government.
These mean that stakeholders cannot faces charges of more than 1.5 per cent a year for the first 10 years, and 1 per a year after that – far less than many personal pensions charge today.
Benefits for part-time savers
Stakeholder pension schemes cannot impose penalties on changing or stopping contributions, or on transferring to another scheme.
This is especially good for anyone with an irregular income, such as those who work part-time, the self-employed and women who take time off work to bring up children.
Simplicity
Stakeholder schemes are required to give the option of a default fund – something which many personal pension plans do not have to do.
This is a good option for investors who don’t feel confident about choosing which funds to invest in and is usually made up of low and low-to-medium risk investments.
You don’t have to opt for this default fund, but for inexperienced investors it can be a straightforward option.
Limited investment choice
You won’t have a great deal of freedom to choose what to invest in with a stakeholder pension, which means having to trust the judgement of your pension fund manager.
Additionally, because stakeholders are designed to be simple, they generally only include low and low to medium risk investments which means your potential returns are likely to be lower than those of other personal pension plans.
Like any personal pension plan, this won’t have the added benefit of employer contributions. If you are only a basic rate tax payer, a company pension (where you will get employer contributions) could well be a better option.
Which one should I choose?The best stakeholders are those with the lowest charges which track a wide selection of funds, ideally with a good geographical spread. The Money Advice Service has a table of some of the cheapest options, which is a good starting point.
If you feel you need a bit of extra help deciding on the best stakeholder for you, contact an independent financial adviser. [Find an IFA]
Good for: inexperienced investors who don’t want to make tough investment choices;those who can’t afford to make substantial monthly contributions or have inconsistent incomes;those who want simple, transparent charges.IMPORTANT: It's quite likely that the pension offered by your employer is a better option, because they may make a monthly contribution alongside your own. Although if they don't chip in, it may be better to pick your own, cheaper scheme. For inexperienced investors WITHOUT access to a workplace pension with contributions, a stakeholder is probably the cheapest and most straightforward option available.
More... Stakeholder pensions: the cheap and simple way to invest for retirement How to find the cheapest 'low-cost' Sipp SIPPs
Generally accepted as an option for those who already have investment Isas and particularly for those who pay higher rate tax, SIPPs offer a much more flexible approach to investments.
That flexibility is the big plus point of this type of pension, but it does mean that the responsibility of picking the right funds is down to you.
You can invest in pretty much anything, from commercial property and gold bullion to more conventional unit trusts and .
When considering this as an option you need to ask yourself whether you are prepared to do the homework, and regularly monitor your investments.
You need to be comfortable making, and taking responsibility for your own investment choices. If you think that applies to you, then a SIPP is probably a good option.
Pros and consInvestment flexibility The biggest bonus of a SIPP is the flexibility to choose exactly what you want to invest in. You will have access to thousands of funds at reduced charges, and be able to hold these investments directly.
Good returns
As with all investments the more risk you take, the better the returns can be. A SIPP gives you the potential to make pretty impressive returns but there are no guarantees and your choice of investments will make all the difference.
Higher contributions
Because charges levied on SIPP investments are generally higher than those on other personal pension plans, making smaller contributions is not really an option. Similarly stopping or changing contributions will usually incur a charge.
Higher charges
It is not necessarily the case that a SIPP will have high charges, but they do come in very different shapes and sizes and can have very confusing, and sometimes expensive charging structures.
Whilst some SIPPs can be expensive compared to other forms of pension saving, more and more ‘low-cost’ SIPPs are making their way into the market as middle-income investors get progressively more fed up with the poor returns on more traditional pensions.
Some leading low-cost SIPP providers include:
Alliance Trust Select Sipp This is a good option for those who don't transact much. No minimum transfer and the minimum investment is £50. Transferring in is free but there is an annual administration charge of £125 plus VAT and £12.50 to buy or sell shares OR funds.
Sippdeal.co.uk (AJ Bell) Good for those who do transact a lot. Free transfers in with no minimum investment. Online share dealing starts at £4.95 if you make 20 trades a month or is otherwise £9.95. It also rebates some - but not all - annual commission charges on funds, up to 0.5 per cent. This falls short of Alliance Trust, which pays it all back - up to 0.75 per cent - but it is free to deal in funds on the extensive Sippdeal fund list.
- Read more about finding the cheapest low-cost SIPPs here.
Good for: Low-cost SIPPs will suit the vast majority of pension savers who are happy to do their homework when it comes to investing. However, SIPPs are probably best suited to confident and diligent investors who can make monthly contributions.