Pensions are becoming an ever more important topic, even among people at the start of their working lives. With fears that some of us are not putting enough money aside for future retirement, it would seem the best option is to invest for as long as you can, and to make sure that this investment is the best plan for you. However, the world of pensions can seem a little murky to the uninitiated, and with the huge amount of claims related to people who feel they have been sold the wrong type of pension for them by financial advisors, it’s a good idea to know the key differences before you start discussing your options.
Before deciding on a specific plan, you need to establish whether you want a Self-Invested Personal Pension (SIPP), or a stakeholder pension.
Who is a Stakeholder Pension Right For?
Stakeholder pensions are aimed at people with lower incomes and people with unpredictable earnings or working patterns (for example people who want to take periods of time off work for things like studying, travelling or having children) or who may not want to commit to investing a high amount every month.
There is a cap on how much you can invest of £40,000 per year (this reduces to only £3,600 if you don’t pay tax), but you can start with as little as £20 per month and won’t be penalised for breaks in contributions. Stakeholder pensions have low charges, and can be relatively simple to manage, also making them a good option for people who just want to pay into their fund.
Who is a SIPP Suitable For?
SIPPs are more flexible schemes where you actively manage where your money is invested. Also, you can get a wide range of options to choose from that includes shares, commodities and more. They tend to be favoured by high-income earners, however there are now plenty of low cost SIPPs which are designed to appeal to mid-range earners that want flexibility and are interested in managing their own fund.
Pros of a stakeholder pension plan
The standards of a stakeholder pension are designed to make the process cheap, accessible, and simple for the customers. Standardizing its various aspects, the money can be drawn from the age of 55 onwards. It comes with a lump sum of tax-free amount tracking to around 25 percent taken straightway. Moreover, the remainder can be effectively used to buy an annuity. Speaking of the age to which the account stands valid is 75. That is, anyone who is aged below 75 can go in for a stakeholder pension. The advantages of the stakeholder pension are given below.
Even if you do not pay tax, you can receive tax relief for all your contributions. The amount is collected and added to your savings account by the pension company you choose.
stakeholder pension plans are specially designed to meet the minimum standards of protocol laid down by the government.
Anyone can pay on your behalf.
Unlike other pension plans, in the stakeholder plan, there may have contributions on your behalf.
The stakeholder pension plan is simple in approach. These schemes are required to fulfill the option of a default fund. While it has some limiting aspects, it is an excellent option for people who are not confident of the funds that have been invested. These are made up of low, or rather, low-to-medium investment risks. In the present scenario, it can be a straightforward option for investing.
Pros of a SIPP pension plan
Greater flexibility of investment
The biggest advantage of choosing a Sipp pension plan is that you have an extensive list to consider for investments. It gives you the flexibility to handle the finance foe pretty impressive returns. Also, you can unlock different funds at reduced prices.
Choosing the SIPP pension plan can have a relatively good amount of returns as compared to the stakeholder pension plans. But contextually, there is no guarantee for the same. The total return would solely depend on your choice of investments, and that would make all the difference in pension plans.
What are the differences between a SIPP and Stakeholder pension plans?
Although both these schemes are offered as a personal plan for you, there are still differences that can grab your eyes.
- Interestingly, both the pension schemes are governed by the same tax relief rules and contribution allowances. To understand its different aspects, dwelling in its initial phases can be beneficial.
- Contextually, stakeholder pension was initially introduced for simplicity. These are capable of accepting contributions as low as $21.80, with an annual charge of 1.5% for the first decade.
- Eventually, over time the yearly charge drops to 1% on the whole. In this case, you may have limited investment choices. Often it is fenced to about 20 funds, as anticipated and managed by the pension provider.
- On the other hand, a SIPP offers a more comprehensive and extensive approach to various investments. It is specifically designed for someone who wants to acknowledge direct control of their pension.
- Interestingly, you can put your feet in more than 2500 managed funds and choose accordingly. You can also choose from various direct investments in corporate bonds, gifts, shares, cash, and investment trusts.
- The SIPP pension plan offers you greater flexibility in terms of investment plans in the short as well as long run.
SIPP and Stakeholder pension plans: Over a factual ground
You may be wondering about where your money goes? Your contributions channel its way in the shares and stocks. For stakeholder pension plans, that may be carried in small funds. This way of investment pools your contributions with other investors, and it can have a portfolio of shares, assets, and other financial bonds. It can effectively ensure diversification for your investment strategies.
Well, that sounds amazing, right! It is good to have some choice but not always with an overwhelming range of options. Choosing a SIPP pension plan can incur higher charges and also higher contributions. Thus, making smaller contributions in the SIPP pension plan may not have hefty returns but is maintained at moderate.
Moreover, the SIPP pension plan tends to be cheaper. For that, you just have to have a provider that insists on offering ultra-cheap indexing tracker funds effectively. In the present context, many SIPP providers have mostly improvised their minimum investment thresholds. You can contribute as little as $27.25 a month or around $122 as a lump sum. So, if you want to contribute with your smaller pots, go for the SIPP option as it would tend to be relatively cheaper. Moreover, if you emphasize simplicity, the stakeholder pension plan offers to be a compelling choice.
Not Sure Where to Head?
If you still aren’t sure which plan is right for you, it could be worth speaking to a financial expert like Best-invest, to assist you in your decision making. For instance, if you are a high earner but don’t want to manage your own portfolio, or you’re a middle-income person who is undecided, such firms can provide the help you need.
Remember though, whether you seek external support or sort this yourself, it’s important you research your options thoroughly before you make a choice.