Introduction
As part of its initiative to redesign the UK financial services landscape the government is, in a surprise move, planning to increase the charges cap that is currently in place on Stakeholder pensions.
Current Stakeholder investors enjoy a pension that has no initial set up costs and features a low ongoing annual management charge that cannot exceed 1% of the fund.
Under new rules currently being drawn up this charge cap looks set increase to 1.5% for new investors.
Note however, that existing plans will avoid these new rules and continue to enjoy the lower 1% fee.
What are stakeholder pensions?
Stakeholder pensions were launched in 2001 as a New Labour answer to the massive pensions shortfall that the UK is facing.
The difference with Stakeholders was that they had none of the myriad of charges that plagued older style pension plans and eligibility was far wider - investors don’t even need to be earning a salary and so contractors on a low declared PAYE salary can invest as can non-working spouses. Investments can also be made on behalf of children and grandchildren.
Stakeholder pensions are very flexible. Investments can be made via the limited company and contributions altered on a month by month basis without any penalties or additional fees.
What are the increases?
From 2005 pension providers will be allowed to increase annual management charges to 1.5% for new investors.
Existing plans will avoid these new rules.
What can you do now?
If you are a contractor, then you can open a stakeholder plan now, even if you can only pay a limited number of premiums. This will secure the current advantageous terms for any future investments.
Over time the savings in admin charges could potentially be very substantial due to the power of compound interest.
You can get up to 48% tax relief by taking out a pension. This means for every £100 invested your take home pay only reduces £52 – a very good return! You can also significantly reduce the pain of IR35 with a pension.
You can find out how much you could save using the Contractor Pension Calculator.