Stakeholder pensions: What you need to know
Our easy to follow guide to setting up a stakeholder pension scheme
Every business should make it their business to know about stakeholder pensions. And fast. They are already in existence and have been since 6 April 2001. But if you are still thinking that this is a nice idea but pensions are something for big companies, you could be facing a big fine.
Since 8 October 2001, every business with five or more staff has been required by law to offer one. According to figures from the Department of Trade and Industry, that could be nearly 400,000 businesses.
So if you haven’t staked out the pensions market, take a minute to read our guide.
What are stakeholder pensions?
Stakeholder pensions are intended to be low-cost pensions for people who can’t join an occupational pension scheme. They are designed to help people earning between £10,000-£20,000 a year and those who don’t earn anything but can afford to save.
Stakeholder pensions are meant to be low cost and accessible. Costs are limited to less than 1% per annum and the minimum amount to pay can be less then £20 a month. Anyone will be able to choose one from a bank or other financial services provider.
But it is more than likely that many people will have to be offered a stakeholder pension through their employment. And that’s where you come in.
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How do stakeholder pensions affect you?
If you employ more than five people, you must arrange access to stakeholder pensions for those who earn more than the National Insurance lower earnings limit, which is currently £3484 a year. You will have to select a scheme that your employees can join.
Does it apply to you?
You are exempt from the stakeholder pension shceme if:
- You employ less than five people. This doesn’t include self-employed people working for you. If you have more employees than this, and four or fewer are entitled to access to a stakeholder pension scheme, you must provide it.
- You already offer an occupational pension. If you already offer an occupational pension scheme to all employees within a year of them joining it may qualify but you still need to check if your scheme meets the regulations.
- You already offer a personal pension scheme. To qualify the scheme must be available to everyone who should have access to a stakeholder pension; you contribute at least 3% of an employee’s basic pay to their personal pension; there are no penalties for pension members who stop contributing or transfer their pension; and you manage the transfer of money to the pension if your staff want you to.
Even if your situation makes you exempt, you can still offer your employees access to a stakeholder pension scheme if you ilke.
Not all employees qualify for access to stakeholder pensions. You don’t have to provide access if they:
- Have worked for you for less than three months running.
- Are already a member of your occupational pension scheme
- Can’t join your occupational scheme because it doesn’t admit people under 18 or within five years of the scheme’s normal pension age
- Decided against joining your occupational pension scheme
- Have not reached the National Insurance lower earnings limit for at least three months in a row
- Can’t join a stakeholder pension scheme because of Inland Revenue restrictions (for example, they don’t usually live in the UK).
But that doesn’t get you off the hook forever. If the situation changes you have three months to designate a scheme.
How do you choose a stakeholder pension scheme?
There are a number of banks, insurers and other finance companies providing stakeholder schemes. Since last October, these companies have been able to register their stakeholder pension schemes with the Occupational Pensions Regulatory Authority (Opra). Click here to look at the register.
There are certain conditions that stakeholder pension scheme providers must meet:
- They can’t charge more than 1% a year on the value of someone’s funds
- Members should not have to pay any extra to transfer in or out of the scheme
- They will take contributions of as little as £20 a month
- The schemes must be run by trustees or authorised scheme managers.
You can choose more than one scheme. But at least one has to be open to all your employees, as some schemes limit their membership to certain trades, for example.
Before deciding on a stakeholder pension scheme, you must consult your qualifying employees as well as any organisations representing them, such as trade unions. However, you have the final say.
Tell your employees about the designated scheme so that they can decide whether to sign up. The law states that you must also allow the scheme provider ‘reasonable access’ to your workforce to talk about the scheme’s benefits.
Although you may provide information about the benefits of saving for retirement, what you can’t do is advise your employees which pension plan – if any – to take up. A stakeholder pension scheme is just one option.
Employees can contribute to the scheme through payroll deductions weekly or monthly. The amount can be either a fixed sum or a percentage of their income.
If your staff ask you to make deductions, you need to tell them in writing within two weeks how you plan to run the payroll deduction system. Include how the employee can ask for a stop to, or change in, their contribution level. You have to accept changes at least every six months and the alterations must be made no later than the next pay period.
You will need to transfer the deductions – along with any voluntary contributions that you are making – to stakeholder pension schemes by set dates. You can do so by various methods, including direct credit transactions, direct debit transactions, direct debit over the internet or cheque to the provider.
As an employer, you can’t be held responsible for the performance of your chosen stakeholder pension scheme. But you can choose another one if you’re not happy with it. However, you’ll have to continue making payroll deductions to the first stakeholder pension scheme for any of your employees who want to stay with it.
Steps to a stakeholder pension scheme
What if I get it wrong?
Personal pensions are a very emotive subject and the regulators won’t tolerate any slip ups. So get it right first time round, or pay later. Literally, Opra has the ability to take court action and employers can be fined up to £50,000 if they fail in their new responsibilities.
When it comes to transferring pay deductions to the stakeholder pension provider, Opra may fine you if you do not:
- Keep an up-to-date record of the payments you make
- Send the record to the scheme provider
- Notify the scheme provider of any changes to the payment due
- Make the payments on time
Stakeholder pension providers are required by law to report to Opra any failed, late or reduced payments that are not explained.