Contract-based pension scheme comparison table

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

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Read the full version of the Pensions supplement 2013.