The state pension in the UK has always been funded by National Insurance contributions. For most people in employment in this country these contributions are taken 'at source' (ie directly from your wage packet). The theory is that the money raised by the government from these contributions can be used to pay for current and future pension payments.

Unfortunately, a number of factors mean that the cost of this scheme is increasing for the government. One of the key factors that has caused this problem is that the proportion of the UK population that are in work has been consistently falling for some time. With people having longer life expectancy than was once the case, the UK population is effectively smalling. This means that the number of people requiring pension payments is increasing at the same time as the number of people paying into the National Insurance scheme is decreasing. It is widely agreed that such a situation cannot feasibly continue.

As a result of these issues, stakeholder pensions were introduced as a cheaper pension provision than many existing schemes.