Group Personal Pensions (GPPs)

Group personal pensions are a half way house between personal pensions and occupational pension schemes . They are money purchase schemes but with notable differences to ordinary occupational money purchase schemes.

A GPP is essentially a cluster of individual personal pensions; not a common fund. The scheme will be administered by a life insurer, and, in theory at least, the running costs ought to be lower than taking out a personal pension plan because of economies of scale.

The advantages of GPPs are:

• flexibility for mobile workers. If you tend to change jobs more frequently, (say more than four times in your career) a GPP will probably make more sense than joining the company's occupational scheme each time you sign up for a new job. The reason is with a GPP, you incur no penalty for 'job hopping'. If you leave your job, you simply take your pension plan with you.
• you own your own investment fund. Having the certainty of knowing what is in your pension fund is worth a little peace of mind. If investment performance is good you'll get a bigger income in retirement, but if it's bad, the reverse is the case. Nevertheless, following the Maxwell affair, where employees pension funds were raided for dubious purposes, many employees would, given the choice opt for the peace of mind of having their own segregated personal pension fund.
• charges of running a GPP ought to be lower than having your own personal pension scheme - because the life insurer operating the scheme has the benefit of 'economies of scale' in that some of your fellow workmates will join the same scheme.

The disadvantages of GPP's are:

• your employers may make no contribution on your behalf leaving you to fund your retirement all by yourself. Where they do make contributions, there may be a tendency to see the GPP as a 'budget solution' and make contributions at very modest levels, at say 2% of an employees salary. This compares with a typical employer's contribution of 5-10% for a final salary scheme.
• risk of under-contributing. As a rough guide, you need to see that you invest around 15% of your gross salary in a pension to ensure a reasonable standard of living (based on your current salary); the nearer you get to retirement the more you should consider saving. If your boss isn't contributing much and/or because of inertia on your part, you may fail to be disciplined enough to keep up these contribution levels.

Last Updated: August 2007 © Moneyextra.com

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