Group Personal Pensions

GPPs

What is a Group Personal Pension (GPP)?
A group personal pension is a tax-efficient savings plan provided by a company. It allows both employers and employees to make pension contributions for their retirement and also provides benefits on death before retirement.

Although GPPs are arranged by an employer, employees’ plans are in their own names. Employees can pay fixed payments or, if payments are taken from their salaries, they can pay a percentage of what they earn.

They can also invest single amounts on a one-off basis and whenever they choose, albeit within certain Inland Revenue-approved limits. The payments can be stopped, started and changed at any time.

What are the tax benefits of GPPs?
GPPs are extremely tax-efficient. For example, employer contributions are fully deductible as a business expense while employees receive basic rate tax relief on the contributions they make (higher rate taxpayers claim the extra relief through their annual self-assessment).

Meanwhile, any growth within the fund itself is free from capital gains tax, while the income generated (with the exception of dividends earned on UK shares) is free from income tax.

Also, if you die before you retire, in most cases there will be no inheritance tax on the value of your fund._Usefully, employees can opt for a tax-free cash lump sum when they retire of up to 25% of their fund’s value. However, the pension itself will be treated as earned income and will be taxable.

Do I need to set up a GPP for my employees?
If you employ five or more staff and don’t currently offer them access to an appropriate pension scheme, you are required, by law, to set one up. This could be a stakeholder pension or a GPP. Your company could incur financial penalties from OPRA (the Occupational Pensions Regulatory Authority) if you fail to do so.

However, it’s important to understand, as an employer, that offering a pension scheme can attract good employees and, more importantly perhaps, retain them. Employers shouldn’t look at GPPs as a necessary burden, they should see them as a way to develop and grow their businesses.

What are the benefits of GPPs?
GPPs are a way for people to gradually and tax-efficiently build up a pension fund, which, on retirement, they can use to buy a regular income, or ‘annuity’. Before they purchase an annuity, they can also decide to take a tax-free lump sum of up to 25% of the value of their fund although this will naturally reduce the amount they have as a pension. Pensions can normally be taken at any time from the age of 50 to 75.

What risks are attached to GPPs?
With pensions, as with most investments, what you receive when you retire is never guaranteed. Fund performance can go down as well as up and interest rates, when you take out an annuity, can work against you.

That said, the majority of pension funds are extremely well diversified and structured to reduce risk over the long term.

Can I transfer a GPP?
Yes, of course, as long as it is to another approved pension plan with another pension company and this is done before you start receiving your pension.

How much can I pay into my GPP each year?
You can pay as much as you like into all your registered pension schemes but there will be limits on the amount of tax relief given. You can get tax relief on contributions of up to 100% of your UK earnings if you are a UK taxpayer.

Any contributions (including any by your employer) above the annual allowance, which will be £235,000 in 2008/09, will be subject to tax, currently 40%. The annual allowance will increase each year until 2010 when the position will be reviewed.

1. You can contribute to a stakeholder or personal pension in addition to your occupational pension no matter what you earn.
2. How much you contribute to your personal or stakeholder pensions is no longer dependent on your age.
3. If you’re not earning but can contribute to a pension, the maximum you can contribute in each year is £2,808 (made up to £3,600 with basic rate tax relief).
4. However, there are pension fund limits, i.e. a lifetime allowance that you can accumulate (free of tax) in all the pension funds you have built up.
5. This will be £1.65m for the tax year 2008/09. You will have to pay tax on any excess over the £1.65m allowance. This is set to rise in stages to £1.8m by the tax year 2010/11.
6. Salary-related pension scheme benefits will be given a value that will count towards the £1.65m lifetime allowance.

Any amount above the lifetime allowance can be paid as a pension benefit but will be subject to a tax charge, currently up to 55%.