The ownership and responsibility of contract-based pension schemes rests with pension providers and scheme members.
The plans, set up by employers, include group personal pensions (GPPs), stakeholder schemes and self-invested personal pensions (Sipps), and vary in terms of, for example, contribution levels and investment limits.
Read on to find out how each scheme rates.
| Group personal pension (GPP) | Stakeholder | Self-invested personal pension (Sipp) | |
|---|---|---|---|
| Definition: | This is an arrangement made by a pension provider or financial adviser that offers personal pensions to a group of employees. Each employee has a separate contract with the pension provider or adviser, but the contributions are collected by the employer through payroll. | This is a type of flexible pension arrangement introduced in 2001, but which is declining in popularity. | A Sipp is a DIY pension with unlimited investment choices and the ability for a member to control their own pension pot. Group Sipps are often used by employers for a group of employees. |
| Providers: | Aegon UK, Aviva, Fidelity Worldwide Investment, Friends Life, Legal and General, Prudential, Scottish Life (part of Royal London Group), Scottish Widows, Standard Life, Zurich Life UK |
Aegon UK, Aviva, Friends Life, Legal and General, Scottish Life (part of Royal London Group), Scottish Widows, Standard Life, Zurich Life UK | Aegon UK, Fidelity Worldwide Investment, Hargreaves Lansdown, Legal and General, Prudential (flexible retirement plan with Sipp options), Standard Life |
| Target audience: | Employers that want to create a group of individual pensions with one provider. | Employers that want to offer staff a pension plan with one provider. | Executive directors and management, as well as employers who want to further enage employees in their savings and investments. |
| Annual management charge (AMC): | Average AMC is 0.8%, but it can be as low as 0.5%. | Typical charges are 1.5% of the total value of the fund for the first 10 years, then 1% after 10 years’ continuous membership. Some schemes offer as low as 0.3%. | Possible charges include the set-up fee, which can cost up to £500, plus an AMC, which is often capped at 0.8%. Share dealing charges can range from £5.95 to £11.95 per trade. |
| Tax implications: | All personal contributions that employees make into a pension are eligible for tax relief, with employer contributions free from tax and national insurance. Staff can contribute up to 100% of their salary into their pension each year, but tax breaks apply only up to £50,000 a yearwhich is currently set at £50,000 and will reduce to £40,000 in April 2014. Contributions that exceed a member’s lifetime allowance of £1.5 million will be subject to lifetime allowance tax. | All personal contributions that employees make into a pension are eligible for tax relief, with employer contributions free from tax and national insurance. Staff can contribute up to 100% of their salary into their pension each year, but tax breaks apply only up to £50,000 a yearwhich is currently set at £50,000 and will reduce to £40,000 in April 2014. Contributions that exceed a member’s lifetime allowance of £1.5 million will be subject to lifetime allowance tax. | No income tax is payable on income arising from Sipp investments, and no capital gains tax. Members receive tax relief at 20%, 40% or 45% on personal contributions, subject to HM Revenue and Customs’ limits and tax status. Up to 25% of members’ pension funds may be taken as a tax-free cash sum at retirement, subject to the lifetime allowance. |
| Contribution levels: | These are determined by employers, but the market average is currently 6% for employer contributions and 4% for employee contributions. | Employers tend not to contribute because of the large fund choice, but contribution levels are at the discretion of employers, which have to comply with the 8% level. | |
| Fund choice: | This will be determined by the pension provider, but often extends to hundreds of fund options. | Typically, about 20 funds, but some extend to hundreds of funds. | Unlimited, with the ability for members to invest only in cash. |
| Auto-enrolment: All three offer employers the ability to postpone their auto-enrolment process. | If used for auto-enrolment, a GPP must satisfy the government’s eligibility criteria relating to, for example, scheme type and contribution rates. Employees hold contracts directly with pension providers, so employers have no legal responsibility once a scheme is up and running. | Employers can use stakeholder pension schemes for auto-enrolment, provided the schemes meet the government’s criteria on, for example, scheme type and contribution levels, as with GPPs. | Sipps can be used, but due to their large fund choice and high degree of financial capability, group Sipps are prefered by employers. |
| Waiting period: | Where an employer has not yet reached the staging date for auto-enrolment new employees are allowed to join a GPP after three months. But once an employer has staged it has to auto-enrol staff within three months. Employees are typically allowed to join a scheme before their employer’s staging date. | Where an employer has not yet reached the staging date for auto-enrolment waiting periods tend to be up to 12 months, because members are typically (but not always) admitted into a scheme on one day of the year. But once an employer has staged it has to auto-enrol staff within three months. Employees are typically allowed to join a scheme before their employer’s staging date. | Waiting periods are usually no longer than three months, but members can join the scheme before their employer’s staging date if it is used for auto-enrolment. |
Read also: Buyer’s guide to group personal pensions at http://bit.ly/1al0lPS