What is a group personal pension (GPP)?
A group personal pension is a defined contribution (DC) arrangement whereby an employer agrees to make monthly contributions into a scheme, but the contract is between the employer and the pension provider.
The pension freedoms that were announced in the 2014 Budget, and came into effect in April 2015, gave employees more choices and greater flexibility over their retirement options. Prior to this, a GPP contract ended when the scheme member retired and bought a secure income, an annuity, with the proceeds, with no obligation on the employer to pay retirement benefits to the employee for the whole of their life.
The pension freedoms give employees aged 55 or over the option to take their retirement savings from their GPP in any way they choose.
They can access a cash lump sum; usually the first 25% of each cash withdrawal from the pot will be tax-free. The rest will be taxed. They can use their pot to provide flexible retirement income, known as pension drawdown, which allows them to take out money as they need it. Or they can purchase an annuity which gives them a guaranteed income for life or a fixed term. The income is taxable. They can choose to do a combination of these.
Office for National Statistics (ONS) data, published in April 2022, Employee workplace pensions in the UK: 2021 provisional and 2020 final results, estimates that there were 20.8 million people in the UK with either a GPP, stakeholder, or self-invested personal pension in 2021.
What are the origins of GPPs?
GPPs were introduced on the back of individual personal pensions, which were launched in the UK in 1988, to replace retirement annuity contracts.
What are the costs involved?
In April 2015, a cap was placed on the annual management charge (AMC) for GPPs of 0.75%. The cap applies to all scheme administration and investment charges, excluding transaction costs.
Under auto-enrolment rules, employers must contribute at least 3% and employees at least 5% of qualifying earnings.
There does not need to be any cost for the employer as the contract is held directly with the provider.
What are the legal implications?
A GPP must satisfy the government’s eligibility criteria if it is to be used for auto-enrolment. The Pensions Regulator can impose fines of up to £10,000 a day on organisations with a non-compliant scheme. A qualifying pension scheme for auto-enrolment means charges must be line with the charge cap, for example.
Employers must automatically enrol any staff members who meet the age and earnings criteria into the scheme at the right time; employees must be enrolled even if they have expressed a wish to opt-out. If they do still wish to opt out, they can do so after they have been put into a scheme.
Employers must ensure that staff receive all the communications about automatic-enrolment required by law, which explain how the scheme applies to them, no later than six weeks after their duties start date.
What are the tax issues?
All employee contributions paid into a pension scheme are eligible for tax relief, while employer contributions are free from tax and national insurance contributions (NICs).
If an employer runs a salary sacrifice arrangement, it needs to ensure contracts meet HM Revenue and Customs’ (HMRC) requirements for a valid salary sacrifice arrangement.
For the 2022/23 tax year, employees will pay contributions on any earnings between £6,240 and £50,270.
What are the current market trends?
In the Spring Budget in March 2023, Chancellor of the Exchequer, Jeremy Hunt, announced an increase in the amount that employees can save into a pension each tax year while still receiving tax-relief on their contributions and their employer contributions. The pensions annual allowance has been increased from £40,000 to £60,000.
The Chancellor also announced the abolition of the lifetime allowance, which previously had a limit of £1 million.
The government also increased the money purchase annual allowance (MPAA) from £4,000 in the 2022/223 tax year, to £10,000 from April 2023. The MPAA restricts how much an employee can pay in while still receiving tax relief, once they have started to draw their pension.
The workplace pension market is constantly evolving and not all providers offer the same proposition. Aviva recommends that employers look at engaging an advisor to see how providers’ offerings compare, especially in the areas of default investment design, including the incorporation of environmental, social and governance (ESG) risks; pension freedoms and at-retirement support for members; online tools and support, member communications, engagement, and financial education. Employers should also consider how the costs and charges compare between providers.
Where can employers get more information and advice?
The Pensions and Lifetime Savings Association: www.plsa.co.uk
The Pensions Regulator: www.thepensionsregulator.gov.uk
Who are the main GPP providers?
The main providers offering GPP plans include Aviva, Aegon, Legal and General, Royal London, Scottish Widows and Standard Life.