Financial products explained
Group Personal Pension Plan
What is it?
Group Personal pension plans (GPP) or Group Stakeholder plans (GSHP) are a relatively straightforward method of providing employees with a pension arrangement. As they are not classed as occupational schemes they are not subject to the more onerous rules and regulations applicable to such schemes, instead they are made up of a series of individual personal pension policies, with each employee having their own policy.
GPP/GSHPs are money purchase schemes allowing both the employer and employee to contribute.
On leaving the employment, the accrued pension will cease to be part of the scheme and will be an individual plan the employee can continue funding to if they wish.
An employer can make contributions into a regulated pension scheme without limit subject to the wholly and exclusively accounting rules.
Employees must meet the following requirements to be eligible to make contributions and receive tax relief on personal contributions; be under 75 years of age, and resident in the UK (there are some exemptions for individuals who work for the UK Government or have left the UK in the last few years).
The minimum contribution will vary between providers but is usually around £20 per month, contributions can be stopped at any time.
Given the many tax advantages that are available with regard to funding a personal pension there are limits to the tax-relievable contributions that can be paid. Individuals are able to make contributions of up to the greater of £3,600 or 100% of their annual earnings to all of their pensions each tax year and receive tax relief on them.
There is also an annual limit, the Annual Allowance, on the total amount of pension contributions that each person can make without incurring a tax charge (this includes employer and employee contributions). Where the total employer and/or employee contribution exceeds the Annual Allowance a tax charge will apply, this will be added to the individual’s taxable income to determine their tax liability. Alternatively, the scheme may agree to pay the charge from the pension benefits if it is over £2,000. For the 2018/19 tax year, the Annual Allowance is £40,000. It may also be possible for contributions in excess of the Annual Allowance to be paid in some circumstances under the rules which allow unused Annual Allowance from the 3 previous tax years to be brought forward and added to the current year’s Annual Allowance.
From 6 April 2016, individuals who have adjusted income (income plus employer pension contributions) for a tax year of greater than £150,000 will have their annual allowance for that tax year restricted. It will be reduced so that for every £2 of income over £150,000, their annual allowance is reduced by £1.
The maximum reduction will be £30,000, so anyone with income of £210,000 or more will have an annual allowance of £10,000. High income individuals caught by the restriction may therefore have to reduce the contributions paid by them and/or their employers or suffer an annual allowance charge.
The tapered reduction doesn't apply to anyone with threshold income (income less personal pension contributions) of no more than £110,000.
Contributions to Personal Pensions generate direct tax savings. Contributions are made net of basic rate tax relief, which means that you will only actually contribute £80 net for every £100 of contributions paid. Higher and additional rate taxpayers likewise make contributions net of basic rate tax and can then claim additional relief via their Self-Assessment return.
Your pension contributions once made will be invested in funds where there is no liability to tax on capital gains and where all forms of investment income are also tax free. Your money may therefore grow faster in a Personal Pension than in most other forms of investment.
An employer is able to contribute, and receive corporation tax relief on any amount that their local inspector of Taxes is satisfied meets the “wholly and exclusively” for the purpose of the business test.
All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs’ practice. Levels and bases of tax relief are subject to change.
The earliest age an individual can take benefits is age 55. The minimum age is expected to increase to 57 from 2028 with further increases as the State Pension Age goes up.
At retirement they have the option to take up to 25% of the fund as a tax free cash lump sum, and the remaining funds will be taxable as earned income.
There is now no upper age limit by which retirement benefits must be taken (particular products may impose their own age limits).
There are no restrictions on people’s ability to draw down from their defined contribution pension pots after age 55. This will allow flexible access to pension savings.
This means there is no particular product that individuals must purchase or invest in when accessing pension savings. It will be up to them to decide how to access their benefits, either as a lump sum or through some sort of financial product.
If the total value of your pension benefits exceeds the “Lifetime Allowance” the excess benefits will be subject to a tax charge of up to 55%. For the 2018/19 tax year the Lifetime Allowance is £1,030,000 but it may be possible to keep a higher lifetime allowance if one of the forms of protection is applied for:
- Individual Protection 2016 (IP2016) – available to those with total pension savings greater than £1 million on 5th April 2016. IP2016 will allow those individuals meeting certain criteria to fix their lifetime allowance at the value of their pension fund as at 5th April 2016, with the maximum protection being £1.25 million. Pension funding can continue but further funding is likely to be subject to a lifetime allowance charge.
- Fixed Protection 2016 - doesn’t require a minimum fund value but is aimed at those who expect their pension funds to exceed £1 million at retirement. It fixes the individual’s lifetime allowance at £1.25 million but doesn’t allow any further pension funding after 5th April 2016.
Payment on death
The value of the pension fund is available to the individuals beneficiaries on their death and can normally be withdrawn as a lump sum or left within the pension wrapper to be drawn on to provide a regular or ad-hoc income – further details are contained in the accompanying literature.
Death benefits, whether drawn as a lump sum or income, are normally payable tax free to the beneficiaries if the individual dies before age 75. Where death occurs after age 75, death benefits withdrawn as a lump sum or income are taxable on the recipients as earned income.
The only death benefits that are tested against the lifetime allowance are those payable from uncrystallised funds (i.e. funds that haven’t been drawn on at all) either as lump sums or into flexi-access drawdown on death before age 75. If those benefits exceed the individual’s remaining lifetime allowance there will be a 55% tax charge on the excess if taken as a lump sum or 25% if placed in flexi-access drawdown.
There are a number of risk considerations that need to be taken into account. It is important that you are aware of these.
- Any employer contribution is dependent upon the continued solvency of the employer.
- Past performance is no guarantee of future returns.
- The price of units and the income from them can fall as well as rise.
- This investment is intended as a long-term investment and under current HM Revenue & Customs’ practice it is not normally possible to access the fund(s) prior to the age of 55. The minimum age is expected to increase to 57 from 2028 with further increases as the State Pension Age goes up.
- Please be aware that there may be occasions when an individual fund or funds may have a higher risk rating than your overall stated attitude to risk. If this is the case, then the overall risk rating applied to all of the combined funds being recommended is still designed to meet your stated tolerance.
The above product information is for general information only and should not be construed as advice. Please contact us for further information.