What is a Group Personal Pension?
Group personal pensions (GPPs) are an increasingly popular variety of pension arrangement often favoured by employers that have abandoned the stakeholder pension model. Group personal pensions are a type of money purchase pension, and tax relief is available on GPPs for both basic rate and higher rate taxpayers.
Group personal pensions are normally arranged by an employer, with the fund being administered by a pension manager of your employer’s choice. Regardless of this, a contract exists between you and the pension provider, rather than between the pension provider and your employer. Many employers make contributions to their employees’ group personal pensions; indeed, in many cases employers are legally obliged to do so unless they are offering another pension scheme, to a value of at least 3 per cent of each relevant employee’s salary.
How is a Group Personal Pension Managed?Group personal pension funds are normally invested in stocks and shares. Your pension fund will often make up part of a larger investment fund. The fund managers’ intention is obviously for the value of the fund to increase over time, but it is important to remember that this is not always the case; indeed, as has been illustrated during the course of the recent pensions crisis, the value of pension funds can often fall. If you are particularly risk averse, you should seriously consider whether a pension of this kind is suitable for you.
This type of pension arrangement is attractive to many because, upon retirement, you will have the option to take a tax-free lump sum. Many retirees use this lump sum to pay off a mortgage or other significant debts. The remaining value of the fund is normally used to buy a lifetime annuity in order to secure an income, although pension holders often have a choice regarding what they do with this money.
How Big is a Group Personal Pension Income?The size of your pension income will depend on a number of factors. Primary amongst these is the size of the lump sum that you choose to take; obviously, the more you take out at the start, the lower your income will be. Similarly, your income will also depend on the size of your contributions and the annuity rates at the time at which you retire.
Unlike stakeholder pensions, which are explained in another article in this section, fund managers are free to charge entry and exit fees. This means that, if you choose to leave a group personal pension you may incur a penalty. If you start paying into a group personal pension as a result of an occupational arrangement, and subsequently leave your job, it is normally possible to leave the fund to grow in the normal way. Alternatively, you can arrange for it to be transferred into a regular personal pension – but you should check with your fund provider before doing so as they may charge a fee for this.
If your employer is offering to contribute to a group personal pension, you will almost certainly get more for your money than if you were to contribute to another fund on your own. However, you should think carefully about the risk involved in this type of pension fund.