Stakeholder pensions at a glance

Eligible employers should have acted by now, says Tim Sargisson. From 8
October 2001 firms with five or more "relevant" employees must offer
access to a stakeholder-compliant pension scheme. He highlights what employers
should know

What is a stakeholder pension?

A flexible, low cost, tax-efficient retirement savings plan, which should
offer good value to everyone, especially those on low incomes. It should meet
minimum standards on cost, access and terms (CAT) standard, namely:

– A maximum charge of 1 per cent of the fund per annum, calculated on a
daily basis of 1/365th per day

– The minimum contribution cannot be set at a level above £20. This applies
to regular and single contributions. There is no minimum frequency or payment

How will stakeholder affect you, as an employer?

Organisations with fewer than five employees will not have to provide access
to a stakeholder pension. This situation will be reviewed after three years.

Organisations with five or more employees have to provide access to a
stakeholder pension scheme from October 2001. Those with an existing pension
scheme may be exempt. At present there is no requirement for employers to pay
contributions to a designated stakeholder plan

Firms needing to offer access to a stakeholder pension must:

– Designate a stakeholder provider for the scheme.

– Provide information about the scheme to employees.

– Offer a payroll deduction facility for employee contributions.

– Enable employees to join the scheme within three months of joining the

– Offer a default investment choice so that staff do not have to consider
investment options for their stakeholder payments.


Firms with five or more "relevant" employees which do not offer
stakeholder pensions will be liable to fines of up to £50,000.

Individuals (such as trustees) will be liable for fines up to £5,000 each.

The Occupational Pensions Regulatory Authority (OPRA) has powers under
Section 10 of the Pensions Act 1995 to fine employers for breaches of rules
relating to occupational pensions. These powers were extended to stakeholder
pensions under Section 3 of the Welfare Reform and Pensions Act 1999.

Why is the Government launching stakeholder pensions?

People are living longer and tending to retire earlier, plus the older
population is increasing faster than the young. By about 2040, there are likely
to be only two people in work for every one pensioner – currently the ratio is
about 4:1 – making it important for everyone to start saving for their
retirement as early as possible.

What exemptions are available?

Employers running an occupational pension scheme This provides an
exemption as long as all employees can join within 12 months of starting with
the firm. Membership does not have to be extended to employees under 18 years
of age, or those within five years of the normal pension age.

Employers running a group personal pension plan They may be exempt
from establishing a stakeholder scheme, so long as:

– The firm contributes at least 3 per cent of employees’ basic pay

– There are no "exit charges" or penalties under the plan

– Employees must be able to join the scheme within three months of joining
the organisation.

Employers with group personal pension plans should also note:

– Staff under 18 years of age are excluded

– If the existing plan has matching employer/employee contributions of more
than 3 per cent, the plan can continue and should be exempt

– The 3 per cent employer contribution can be conditional on employees
making a matching contribution of up to 3 per cent. The situation for group
personal pensions will be reviewed after three years.

Is stakeholder my only option?

No. You can opt to set up a pension scheme which suits you and your
business. You won’t have to provide a stakeholder pension as long as all relevant
employees are given access to a pension, which conforms to the stakeholder
criteria detailed above.

Why should I have a pension scheme for employees?

Apart from it being now being a legal obligation, it will bring benefits to
the firm:

– In an increasingly competitive employment market, a comprehensive benefits
package, including a good pension scheme, is important.

– It can help attract quality staff to your business and over the long term
a pension scheme can encourage existing employees to stay with your business.

– A pension is one of the most tax efficient ways of investing – for both
you and your employees:

– Your contributions to employees’ pensions are treated as a business

– Corporation tax relief is usually granted in the year in which
contributions are paid, at the highest rate payable by your business. This can
reduce the potential amount of taxable profits earned by your business.

– Contributions paid by employees also receive tax relief at the highest
rate of tax they pay, thereby reducing their personal tax liability.

– Very little tax is paid on the actual growth in value of pension
contributions, allowing more of the growth to remain in the pension.

– Under stakeholder, only a very small amount goes to administering an
employees’ pension arrangement.

Additionally, stakeholder is beneficial to employees as:

– They can stop and start contributions as they wish

– If they are unhappy with a stakeholder provider they can transfer to
another provider without incurring financial loss or additional charges.


– Employers have a key role to play in stakeholder pensions.

– A pension for your employees will no longer be an optional extra.

– The requirement for employers to choose and offer their employees access
to a stakeholder scheme is a legal requirement and this will be closely

– An Independent financial adviser could help in choosing the right type of
pension scheme for your staff and your business.

– Doing nothing is not an option.

Always take professional advice before applying the contents of this

Tim Sargisson is the sales and marketing director for Swipe plc, the
online pension solution established by Smith & Williamson. Tel: 020-7637
5377, e-mail:

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