Personal pensions and stakeholder pensions - by independent financial adviser John Bramwell

Personal and Stakeholder Pensions

What are they?

Personal pensions (PPs) are merely tax-efficient wrappers that can hold a range of investments and were established in 1988 to supplement the State Pension and replace their predecessor the Retirement Annuity Contract.

Stakeholder pensions (SPs) were introduced in 2001 and are PPs that have specific rules to ensure they have a low charging structure.

Some pension companies have reduced the charges made on their PPs such that the main difference between them and the SP is the selection of funds allowed in each pension. However, plans started before 2001 can still have the higher charging structure and should be reviewed and transferred to an appropriate lower charged product, if required.

What investments can your plan hold?

The majority of PPs and SPs can hold a range of collective funds and should be selected based on their expected return and your attitude to risk. Historically pension companies have offered their own collective funds but increasingly are now offering funds managed by external fund managers.

Because of the charge cap on SPs the range of funds can be restricted sometimes to only the pension company's own funds. Often for PPs the pension company allows you to use external fund managers, which can offer improved potential returns.

How much tax-relief will you get?

Anyone (even children) can have a SP or PP up to age 75. If you have no earnings then the amount invested can't exceed £2,880 per year, which is equivalent to £3,600 gross per year when the assumed 20% tax is added.

For contributions based on earnings, HMRC will give tax relief on the contributions. This means that for a basic rate taxpayer HMRC will pay into the pension fund £20 for every £80 that you contribute. For a higher rate taxpayer the same applies plus you will be able to a claim back a further £20 from HMRC to give the full 40% relief.

How much can you pay into a pension?

Prior to 6th April 2006 (A-Day) contribution limits were dependent on age as well as salary. Now, however, you can pay 100% of your earnings into a pension, subject to an annual limit of £235,000 (2008/09).