Group Personal Pensions

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    Group Personal Pensions

    Sometimes a small employer wants to offer pension provision for their staff, but their size does not warrant a large defined contribution scheme. In these cases a group personal pension (GPP) is often used.

    A group personal pension is usually set up by an employer. It is simply a collection of individual personal pension plans for members of staff that want to join. GPPs work just like any other personal pension plan with the holder making regular pension contributions to a pension fund. Over time theses contributions and the investment returns achieved by the fund build up. The provider will levy yearly management charges on the plan. At retirement the accumulated pension savings are used to buy an annuity to give the holder a guaranteed income for life.

    The key difference for a group personal pensions and a personal pension plan is that the charges made by the GPP provider may be lower than those for a similar individual plan. This is because the provider may reduce some of the administration fees that it charges in return for bulk business.

    With a GPP an employer can make contributions to their employees pension plan, if they so choose, helping to boost their employees’ pension savings.

    How group personal pension work

    Once your employer has decided to offer a group personal pension they will select a pension provider for the scheme. Employees can then join the scheme and establish an individual contract between themselves and the pension provider.

    As with all personal pension schemes the plan holder’s pension savings will be accumulated from their contributions and, where appropriate their employer’s, the investment returns achieved by the pension fund and tax relief.

    The pension provider will claim tax relief at the basic rate and add it to the pension fund. Higher-rate taxpayer will need to claim the additional rebate through their tax returns.

    When the holder decides to retire they will use this accumulated pension pot to buy regular income for life (an annuity), less any money taken as a tax-free lump sum. Or, they can use income draw down and keep the fund invested and draw off income in retirement.

    Rules governing group personal pensions

    Group personal pensions are available to UK resident under the age of 75. From the 6th of April 2016 the holder can take retirement at anytime after they reach the age of 55, though the pension pot must be used to buy an annuity by the age of 75.

    A group personal pension plan will usually be automatically changed into a personal pension plan if you change jobs. If you’re new employer has a pension scheme and makes pension contributions, you may be better off joining this scheme. If not, you can continue pay pension contributions into your personal pension plan.

    There are no limits to the amount of annual pension contributions you can make to your group personal pension plan although there are restrictions on the amount of tax relief you will receive.

    The advantages

    A pension plan is a tax-efficient way to save for retirement. Just like an individual personal pension plan, contributions to a GPP qualify for tax relief. Plus, when you retire you can take up to 25% of the value of your pension fund as a tax-free lump sum, and buy an annuity with the rest of it.

    If your employer makes contributions to group personal pension plans these are well worth having and could be a good reason to join the group personal pension plan.

    Your pension provider should offer a selection of investment funds. You should have the flexibility to switch between these funds according to your needs.

    The disadvantages

    As with all personal pension schemes, the amount of retirement income provided by the plan will depend on the amount paid in, the investment fund returns and the annuity rate used to convert the pension pot to annual income in retirement. If the fund has poor returns or annuity rates are low you may get less than you expected in retirement, so it is important to monitor your pension planning and increase contributions if necessary.

    The charges can sometimes be quite high for a group personal pension, compared to some other types of occupational scheme, although they should be less than for an individual personal pension plan.

    Generally, an employer will decide on the GPP provider so you may not have a say in the selection. You will probably have to cover the cost of any commission paid.