Pensions – Stakeholder or Personal?

Pensions – Stakeholder or Personal?

by David Redmond on 15 Jun, 2011

As with almost every other type of financial decision, choosing a pension plan can be an incredibly daunting process. Like most areas of personal finance, the pensions market is a maze of variables that may make little sense to a novice. Considering the importance of ensuring you’ve saved enough for twilight years, it is probably a good idea to hire an Independent Financial Adviser (IFA) to help you make your choice. However, it’s always good to know as much as you can yourself, so with that in mind, here is our quick introduction to the difference between stakeholder pension plans and personal pensions.

Stakeholder pension plans were introduced by the government after personal pension plans were criticised for often charging too much, sometimes up to around 5% of the value of the plan. Stakeholder pensions have fees capped at a 1% legal limit (although plan providers may also add on charges to recover costs incurred in managing the fund, such as stamp duty, meaning this legal limit can often turn out to be more like 1.3%).

Naturally lower charges mean that you keep a much greater proportion of your plan than under a personal pension, however, because the lower charges mean the providers can’t afford to hire a fund manager for these plans, they are usually left to more passive ‘tracker’ funds which grow or shrink depending on the state of the overall stock market. Similarly, as there is little way of IFA’s recovering their money from you signing up to a stakeholder plan, they often won’t advise you on these plans, so you’ll have to do your own research on who the best providers are.

Personal pension plans are based on creating a dedicated investment fund for you actively overseen by a fund manager. The advantage over the stakeholder is clear – by having the fund actively managed you stand to make much greater gains than on a passive stakeholder tracker fund.

The trade off is in paying the much higher charges. There is great debate amongst IFAs as to whether this is a cost effective trade off or not. Personal pension fund managers will say they earn their fee, making the higher percentage costs a moot point (better to pay 5% of £100 than 1% of £10). However, many people say the difference between the two is not great enough to make the higher fees for a personal pension fund worthwhile.

That being said, as with anything in finance – those who take the greatest risks may get greater rewards. A personal fund won’t necessarily result in a bigger pension pot, but it stands a higher chance of it doing so than a stakeholder.

About the Author

David Redmond


David Redmond is a Partner of Don Gilliard Finance Group. He is a fee-only, independent financial advisor and financial planner. For over 15 years, he has been helping individual investors and their families realize their investment goals.