Group Personal Pensions
Group personal pensions (GPPs) are a type of defined contribution pension which some employers offer to their workers. As with other types of defined-contribution scheme, members in a GPP build up a personal fund, which they then convert into an income at retirement.
Group Personal Pension – How Does It Work?
In a group personal pension, the scheme is run by a pension provider that your employer chooses, but your pension is an individual contract between you and the provider.
The provider claims tax relief at the basic rate on your contributions and adds it to your fund. If you’re a higher or additional-rate taxpayer, you’ll need to claim the additional rebate through your tax return.
Your pension fund builds up using your contributions, any contributions your employer makes, investment returns and tax relief.
It helps to think of defined-contribution pensions as having two stages.
Stage 1 – While You Are Working
The fund is usually invested in stocks and shares, along with other investments, with the aim of growing the fund over the years before you retire. You can usually choose from a range of funds to invest in. Remember though that the value of investments may go up or down.
Stage 2 – When You Retire
When you retire you can take a cash lump sum from your fund and convert the rest into a retirement income (also known as an annuity).
The amount of income you’ll get will depend on:
- how much you pay into the fund
- how long you save for
- how much, if anything, your employer pays in
- how well your investments have performed
- what charges have been taken out of your fund by your pension provider
- how much you take as a cash lump sum
- annuity rates at the time you retire
- the type of retirement income you choose
Your pension provider is likely to offer you a retirement income based on your fund, but you don’t have to take this. You should always shop around for a better rate.
What You Need To Think About
If your work gives you access to a pension that your employer will pay into, then unless you really can’t afford to contribute or your priority is dealing with unmanageable debt, staying out is like turning down the offer of a pay rise.
The amount your employer puts in can depend on how much you’re willing to save, and may increase as you get older. For example your employer may be prepared to match your contribution on a like-for-like basis up to a certain level, but could be more generous.
If you change jobs, your group personal pension is usually automatically converted into a personal pension and you can continue paying into it independently.
However, you should check to see if your new employer offers a pension scheme. You may find you’ll be better off joining your new employer’s scheme, especially if the employer contributes. Compare the benefits available through your employer’s scheme with your group personal pension.
If you decide to stop paying into a group personal pension, you can leave the pension fund to carry on growing through investment growth – check to see if there are extra charges for doing this.