Stakeholder Pensions

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Pension plans can be one of the most tax-efficient ways of saving for retirement.

The Government will normally give you tax relief that may help increase the value of your plan. If you're a basic rate taxpayer and pay £80 into your plan each month, the Government will automatically top up your investment with an additional £20.

There might be further tax relief if you're a higher or additional rate taxpayer. You can claim this when you fill in your annual tax return, or by writing to your Tax Office.

Work out how much you could save in tax relief when paying into a pension.

There are other tax advantages offered by a pension plan –

• Investments in pension plans are generally free of UK income and capital gains tax, although we can't reclaim tax deducted at source from the dividends of UK company shares.
• When you retire you can normally withdraw up to 25 percent of the value of your plan as a tax free lump sum, although remember that your retirement income will be liable to income tax.
• If you die before you retire, no inheritance tax will normally be payable on the value of your plan, although any dependants' income will be liable to income tax.

The value of the tax benefits of your plan depend on your individual circumstances. Your circumstances and tax rules may change in the future.

You can normally choose your retirement age – anytime between the ages of 55 and 75. However, you can transfer to another pension arrangement if your wish to take your benefits later than age 75.

At your selected pension date, you have a number of options to choose from. You don’t need to make any decisions now, but when you do, you may want to discuss your options with a financial adviser.

• You can use your fund to provide an immediate pension, giving you a regular taxable income for life
• You can normally take up to 25% of your fund as a tax-free cash lump sum, using the balance of your fund to provide a (reduced) taxable pension for life
• You can give up part of your pension, to provide a taxable pension for your husband, wife, registered civil partner or other dependant after you die
• You can also choose whether you want your pension to remain level throughout your life or to increase automatically each year
• You can delay buying your pension, but still take a taxable income by moving to Income Drawdown.

Many people would rather not think about how much money they'll need at retirement. But remember that every day you put it off makes a difference to your income when you eventually do retire. And by then, it may be too late to do anything about it.

View our Cost of Delay Calculator

The first step you need to take is to work out how much income you think you'll need when you retire. Although you may have paid off your mortgage, and don't have work related expenses, you'll have a lot more leisure time to fill and you may need to replace some of the benefits your employer provided, such as life assurance or private health cover.

Once you have an idea of how much you'll need, compare this to how much you're likely to get from your existing pension plans. You should also take into consideration the amount you'll receive from the State. This could include the Basic State Pension and Pension Credit. Visit the Pension Service website for more information on this and any other forms of income you may have.

If there is a gap between the amount of income you think you'll need and the amount you're likely to get, you may want to save more now. The more you can pay into your pension plan, the more income you're likely to have when you retire.

You should consider putting aside as much as you can reasonably afford – the long term rewards can be well worth it.

Our Quick Pension Calculator can help you work out how much you might need to save each month.

What you get will depend on what you put in, how long you keep making payments, how investments perform, the tax treatment of your plan and annuity rates when you choose to take your benefits.

You can normally choose your retirement age – anytime between the ages of 55 and 75. Once you’ve decided how much income you think you’ll need and when you want to take it, you can work out how much you might need to save to reach your retirement goal.

Use our simple Pension calculator to get an idea of how much you might need to save.

If you change jobs, become self-employed or leave paid employment then you simply take your plan with you. In most cases, you (and your new employer if you have one) will be able to continue making payments to your plan. Please note that, regardless of whether you are earning or not, there will be a limit to how much you can pay.

You can increase the amount you pay at any time. You can even stop making payments if your circumstances change, although you should always consider such a decision carefully and consult a financial adviser if you need more information, as it will mean less money is available when you take your pension.

Like most private pensions, our Stakeholder Pension has an annual fund charge to cover the administration and management of the plan. This is currently 1% for the lifetime of the policy.

Your payments into a Stakeholder pension usually qualify for full income tax relief at the highest rate you pay. Any payments that exceed 100% of your relevant UK earnings (or £3600 gross if higher) in any year won’t qualify for tax relief. Similarly, payments by your employer, or any funds that you transfer in from another pension scheme, will not qualify for tax relief. If you’re not working, you can still get tax relief on your payments; though you can only pay in up to £2880 net (£3600 after tax relief is added) each year. Tax treatment depends on your individual circumstances and may be subject to change in the future. Here’s how it works:

If you are a basic rate tax payer

If, for example, you make a net payment of £80 a month to your Stakeholder Pension plan. HM Revenue and Customs will currently top it up with an additional payment of £20. You now have £100 a month going into your pension plan.

What you pay: £80
Add tax relief: £20

Total going in to your pension: £100

If you are a higher rate tax payer

If, for example, you pay the same £80 you’ll get the same automatic £20 top-up. You then claim the difference between basic and higher rate tax relief in your self-assessment tax return. This is currently £20, so your £100 gross payment effectively costs you only £60 under current tax rules.

What you pay: £80
Add automatic tax relief + £20
Additional tax relief you reclaim: £20
Net cost to you: £60

Total going in to your pension: £100

The information on this page is based on current tax rules, which may change in the future. Additional rate taxpayers (those with taxable income over £150,000 pa) may also claim additional rate tax relief via their tax return.

An additional income tax rate of 50% applies to incomes over £150,000.

What you get will depend on what you put in, how long you keep making payments, how investments perform, the tax treatment of your plan and annuity rates when you choose to take your benefits.

You can normally choose your retirement age – anytime between the ages of 55 and 75. Once you’ve decided how much income you think you’ll need and when you want to take it, you can work out how much you might need to save to reach your retirement goal.

Use our simple Pension calculator to get an idea of how much you might need to save.

No tax relief is available on any payments you make that exceed 100% of your net relevant UK earnings, or £3,600 (gross) if higher. Scottish Widows cannot accept any payments from you that do not qualify for tax relief.

In addition, an Annual Allowance applies to the amount of payments made to your pension plan each year. If the payments made to your pension plan in any year exceed the Annual Allowance, you will be liable to pay a tax charge on the excess. The Annual Allowance is set each year by the Government. For the 2012/2013 tax year, it is set at £50,000.

A Lifetime Allowance, also set by the Government, applies to the total value of pension benefits you can receive from all your pension plans. A tax charge must normally be deducted from any benefits that exceed the Lifetime Allowance, before they can be paid. The Lifetime Allowance for 2012/2013 tax year is set at £1.5 million.

See our Key features for more information on tax relief, the Annual Allowance and the Lifetime Allowance.

The above information is based on current tax rules which may change in the future.

We offer you a range of investment funds and a number of lifestyle switching options to choose from.

If you do not choose an investment fund(s), all payments will be invested in our default investment option. If this option applies to your plan, all payments will initially be invested in our Consensus Fund. We will gradually switch your investment into lower risk funds over the five years before your chosen retirement date. We do this with the aim that your plan will be invested approximately 75% in our Pension Protector Fund and approximately 25% in our Cash Fund at your selected pension date. Any payments into your plan from 5 years before your chosen retirement date will also buy units in these funds. The value of an investment is not guaranteed and can go up and down depending on investment performance (and currency exchange rates where the fund is invested).

Before making a decision, you may want to contact us, or consult a Financial adviser.

The full value of your pension plan will normally be used to provide a cash lump sum for your dependants, for stakeholder plans taken out after 1 January 2007, we offer an additional benefit called ‘Accidental Death Benefit’. In the event of an accidental death in the first 5 years, which meets the terms of the policy we’ll pay out the greater of the value of your plan or the Accidental Death Benefit.

Normally no Inheritance Tax is payable on the value of your plan. However, if your plan is used to provide a lump sum death benefit, any amount in excess of the Lifetime Allowance (for the 2012/2013 tax year £1.5 million) may be subject to a Lifetime Allowance tax charge. There’s normally no charge if the excess is used to provide a pension for your husband, wife, registered civil partner or dependants. (Note that such pensions are treated as earned income and could be taxed in payment.)

When your plan is set up, you will receive your policy documents followed by a personalised Illustration based on your chosen payments, fund choices and selected pension date. This will show you what you might get back when you take your pension.

Every year we’ll send you an updated pension benefits statement which shows the value of your plan and what you might get back, assuming certain assumptions are met. You can also keep track of your pension online, as well as checking daily fund prices.

We hope you have found this summary of frequently asked questions helpful. If you have any further questions please contact us.