What is a stakeholder pension?

A stakeholder pension is a form of personal pension that has low fees and is typically aimed at those investing small amounts or not wanting to manage their own investments.  

The fees for these pensions are regulated by the government’s stakeholder pension rules, which aim to keep a lid on charges and offer savers a simple pension option. These limits are a maximum of 1.5% fee for the first 10 years, and 1% for years after.  

Providers are also required to offer default investment options for those that don’t want to choose their own investments, and stakeholder pension minimum contributions are just £20 or less.

How does a stakeholder pension work?  

Stakeholder pensions are popularly used by those who are not offered a workplace pension, and can be a simpler alternative to a Self-invested personal pension (SIPP).

You can add funds to your stakeholder pension through one-off or regular contributions, or by transferring in other pensions, like old workplace pots.  

These pensions are defined contribution schemes, which means that you will save up and invest a pot of money, and then gain access to that money during retirement. Currently, you can access a stakeholder pension at 55, but in 2028, this will raise to 57.

Just like with other pensions, you’ll receive a government ‘top up’ for your contributions of 20% for basic-rate taxpayers.  

Is a stakeholder pension worth having?  

For those looking for a simple investment strategy, stakeholder pensions could be an appropriate option. Workplaces are not required to contribute, like they would be for a workplace pension, but if you’re not in a career that offers this, such as if you’re a stay-at-home parent or self-employed, it can be a good option.  

Even if you’re just able to make small investments to your pension, such as £50 per month, it can make a large difference over time. Assuming a growth rate of 5% each year, if you invested £50 each month starting at 25, you could have a pot of near £42,000 by 55. If that money was only saved in cash, it would be just £18,000, according to calculations by AJ Bell.  

Stakeholder pension vs SIPP

While these pensions come with lower fees, it’s important to be aware that you may have less flexibility with your investments. While personal pensions like a SIPP offer a broad range of strategies and investment options, like individual stocks, these options are much more limited in a stakeholder pension. Instead, there will usually be pre-set options you can choose from.  

If you want to become more involved in your investment journey later on, you can always choose to transfer your stakeholder pension to a SIPP. However, SIPPs don’t have the same regulations for minimum investments or fees, so it’s important to be aware of the facts of your new SIPP and ensure they fit your lifestyle before you make the transition.

Many modern SIPPs are pretty low cost however, and depending on the fund you choose, may actually be cheaper than a stakeholder pension. You need to be comfortable choosing your own investments with a SIPP though, but you’ll often find plenty of help from your provider.