Like a typical Personal Pension, a Stakeholder Pension works by you making regular payments into your pension policy. Your money is invested on your behalf into different types of investments such as stocks and bonds.

Depending on your particular Stakeholder Pension scheme, you may have more or less choice on how your money is invested on your behalf.

On the upside, Stakeholder Pensions are designed to be faired than traditional Personal Pensions with their lower annual charges and greater flexibility.

On the downside, in addition to the obvious risk of market forces working against you and that subsequently the value of your pension did not grown in value as much as you hoped. This unfortunately is the risk attached to investing and relying on market forces. 

Risk And Reward!

The risk and reward concept that we outlined in the introduction to UK Personal Pensions section is equally applicable here bearing in mind the similarities between Personal and Stakeholder Pensions

It is important to bear in mind that as with any sort of investment, there is no guarantee that your Stakeholder Pension policy will increase in value. It will depend on market forces. As a general rule of thumb, many people often prefer to take on more risk earlier on in their lives by choosing asset classes (a formal way of referring to stocks, bonds and other types of investment categories) that have can perhaps be above average in terms of risk but consequently more likely to lead to their policies growing considerably more in value. 

Later on in life as people move closer to retirement they obviously do not have a lifetime of earnings ahead of them so they reduce risk by altering their asset allocation. By doing this their policy might not increase in value as much as it could potentially through a riskier asset allocation, but it would less likely to lose significant value in the market.  

A second major drawback is that the annual contribution limit is quite low – at just £3,600 – so they are unlikely to be suitable for high earners who may want to save considerably more than this per year.