What are stakeholder savings?

Does saving money confuse you? Jennifer Lowe looks at the development of stakeholder saving and how it could benefit you…

Stakeholder saving is a Government scheme designed to help consumers decide which products to choose.

Products within the scheme should be; easier to understand, upfront about any changes that you must pay and what they are for, clear about how your money is being used, and realistic about how much money you will make.
There are four types of stakeholder savings products; short-term, medium term, long term and child trust funds.

Short-term
There are two short-term stakeholder savings products available; mini-cash ISA and a savings account.

Some mini-cash ISAs are part of the stakeholder scheme. Stakeholder mini-cash ISAs enable you to invest with as little as £1, earn interest on a daily basis and have instant access to your money from a cash point.
The savings accounts are similar to this, but you have to pay tax on the interest earned.

Medium-term
There are two medium-term stakeholder products available; medium-term ISA and investment plan. Both are stock market based investments designed to be held for at least five years.

The main advantages of the ISA is that you can start with as little as £20 and add to it whenever you like. Unlike other stock market based products there won’t be any set up costs for investing.

You may also be charged an annual management charge, but this will be no more than 1.5 per cent of your fund each year.

Long-term
The only long-term stakeholder investment option available is the pension, aimed at lower and middle-income earners who are not able to join an existing occupational pension scheme.

Most employers who don’t already have a pension scheme, have to offer access to them, although they are fully portable, in that they belong to the individual investor and move with them from job to job, rather than the individual having to be a member of each company’s group pension scheme.
You can stop and start payments without penalty and continue to make contributions while you are not working.

Stakeholder pensions can also be transferred from one provider to another at any time without charge, and plan holders can take a career break of up to five years and continue paying into their stakeholder plans on the basis of their former earnings.

They are low cost with no start-up charge and annual management fees can be ‘capped’ at 1 per cent.

Minimum contributions are also lower than most standard personal pension, set at £20 for lump sum as well as monthly savings, and employees are eligible to join employer sponsored stakeholder schemes after only three months in a job.

Anyone under 75 can save as much as they like in a stakeholder pension. You get tax relief on contributions of up to 100 per cent of your earnings each year, subject to an upper ‘Annual Allowance’ (£215,000 for the 2006 – 2007 tax year).

Stakeholder plans can also be set up on behalf of children and non-working spouses. Individuals can only have one stakeholder plan, but there are no restrictions on who can pay into a stakeholder pension – for example, husbands can contribute to their wife’s plan, grandparents to their grandchildren, and so on.

Child Trust Fund (CTF)
Child Trust Funds are available to any child born on or after 1 September 2002. Parents will receive a £250 (or £500 for lower income families) voucher to invest in a CTF and then at seven the child will receive a further voucher of £250, or £500 for lower income families.

The stakeholder CTF is stock market-based with the aim of providing greater returns than cash savings. Parents, friends and family can contribute up to £1,200 a year and the money can be invested in cash or stocks and shares.
The main advantage here is that there will be no tax to pay on the investment which can go to the child once he or she reaches 18.