Should we be really discounting Stakeholder Pensions?

by Kimberley Malin DipPFS Cert CII (MP)

There are a few rules in our regulated profession that we have to follow regardless, and considering and/or discounting a Stakeholder Pension when recommending a new pension or contribution into an existing scheme is one of those rules.

They are commonly discounted as not the “best” option for a client. However, is that still valid?

Let’s start by exploring ‘What is a Stakeholder Pension?’.

A Stakeholder Pension is a simplified type of Personal Pension, and it was designed to have lower charges and a low level of minimum contributions allowable. Its mechanics are similar to a Personal Pension; however, the provider has extra rules they have to abide by.

v? The pension provider has to accept minimum contributions of ￡20 per month.

v? Pension providers cannot charge more than 1.50% in fees for the first 10 years, then 1.00% per year thereafter.

v? There can be no penalties if you stop contributing or decide to transfer the ‘pot’ elsewhere.

v? There has to be the option of a default investment if you do not wish to self-select your own funds to invest in.

So far, none of these seem too extreme or different to the options available with modern pension arrangements available through Personal Pension providers or platforms…except the cost!

As we can see, there are plenty of pros to a Stakeholder Pension, but what are the parts that need to be further considered when creating a Financial Plan for a client?

v? Many Personal Pension providers now offer lower monthly contributions with no penalty to stop these contributions or transfer the ‘pot’ away.

v? The pension market is a very competitive one, and we are now often seeing fees that are less than 1.50% or even 1.00% per year.

v? Most Stakeholder Pensions offer a very limited range of funds. The client will not have the option to invest in a wider range or funds or portfolios. This is important, as the client should only be investing into a fund or portfolio that the Financial Planner believes is suitable, and this should consider the wider range of options available in the market.

v? There is a distinct lack of providers in the market that are now offering Stakeholder Pension plans. There are providers that still administer the existing plans, but the new-plan offering is limited.

v? Platforms that offer Personal Pension and Self Invested Personal Pensions usually offer better technology, which benefits both the client and financial planning firms. Technological advances are usually high up the list of priorities of all modern platform offerings, as they allow the firm to be more efficient (therefore, not more expensive as a result) and act quicker for the client – which is super important when they need income or a lump sum out of their pension.

There are not that many options around anymore for Stakeholder Pensions, even if a recommendation for one was needed.

I used an independent research tool to research the providers in the market that offered a Stakeholder Pension currently. This indicated that there were only two that still offer Stakeholder Pensions to new customers - Aviva & Standard Life.

The Standard Life website (Stakeholder Pension Plan | Standard Life 27/02/2024) shows a comparison of their Stakeholder Plan vs their Active Money Personal Pension.

Here we can see that straight away, the Personal Pension has the potential for lower charges, has a wider fund range and can offer flexible options such as flexible withdrawals at retirement, and you can apply online, whereas the Stakeholder Pension does not offer this.

As we have seen, with the drive of technological advances over the last 10 years, it is surprising to see that you still cannot apply for a product like a Stakeholder Pension online, considering they were supposed to be the low cost, ‘easy’ option in the pensions market.

Aviva, on the other hand, offers a Stakeholder Pension with charges, ranging from 0.45% - 0.55% - this is a tiered charging structure depending on the fund size. A difference with the Aviva Stakeholder plan is that it does offer Flexi-Access Drawdown.

Although there are, once again, benefits to the Aviva Stakeholder plan, the fund range is limited, and the options available mean you would need to ‘cherry pick’ from a range of single or multi-asset funds, therefore limiting your investment options. That said, this might be suitable for some clients who just want one multi-asset fund that meets their agreed level of investment risk.

So what does this mean?

It is pretty standard that a suitability report covering a new pension recommendation or a contribution to an existing plan discounts using a Stakeholder Pension because “they do not offer all the features and benefits we believe are needed” or something similar. However, without researching the options available, how can we really say this? This fundamentally highlights the need for Paraplanners to question everything they are doing to ensure we can evidence what we are telling clients every day.