What is a personal pension and group personal pension?

There are hundreds of personal pensions available on the market and making the right choice can be daunting and confusing.

Personal pensions or private pensions which are sometimes also called (the two terms are interchangeable) are pensions that you arrange and set up yourself, they are retirement savings plans which are designed to provide you with an income at retirement.

With personal pensions, you pay contributions in the form of regular monthly or annual payments and/or lump sums to a pension provider. 

Stakeholder pensions 

Stakeholder pensions are a type of personal pension, and they must satisfy specific government requirements i.e. limits on charges. 

They are more flexible because they allow you to vary the amount you pay and when you make payments, they can be a good choice if you need a more flexible option.

Self-invested personal pensions (SIPPs)

SIPPs are a flexible type of personal pension that allows you more control over the specific investments that make up your pension fund. 

They are usually held on a platform which allows you to pick stocks, shares and multiple other funds of your choice, some platform providers can provide investment recommendations to you. 

Charges can be higher than other pensions due to the wider choice of investments and their flexibility. 

You can choose to manage the funds yourself at your own risk or pay the platform providers to manage your investments for you and pay a fee for this service, different provider fees can vary significantly. 

Group personal pensions (GPPs)

Then there are group personal pensions which are workplace schemes or a company pension set up by your employer.

With a group personal pension, your employer also contributes a regular monthly amount.  

A group personal pension - and the clue is in the name will always turn into a personal pension once your employer no longer pays into the scheme and you leave the company. Both personal and group personal pensions are also known as defined contribution or money purchase pension schemes. 

See our guide on the structure of the UK’s pension market.

Members may also benefit from better and more favourable terms than offered by normal personal pensions.

It is important to note that once a group personal pension becomes portable and turns into a personal pension, pension charges may increase as the favourable terms under the group personal pension come to an end.  

It would be wise to consult with a financial advisor if you are considering moving company to see if you can reduce any excessive pension charges on the newly formed personal pension.

Excessive charges over time can drastically impact your pension fund and reduce the amount you receive at retirement. 

It may be possible to transfer pension savings from other pension schemes to your GPP. Consolidating your funds can make it easier for you to keep track of and manage, transfer payments do not receive tax relief. 

However, transferring may not be the best choice if you stand to lose valuable benefits from your other schemes.

You should seek advice from an FCA regulated financial advisor before you make any decisions.

Tax relief is the best advanatage of having a personal pension

Pensions are one of the most tax-efficient ways to save for your retirement. A huge advantage of both personal / group personal pensions is that you will usually get tax relief tax relief from the government on your contributions which is added to your pension fund.

The money is then invested on your behalf in a range of assets for example stocks, shares, bonds and similar financial vehicles to provide an income for when you retire. 

Options for accessing your funds

You can normally start accessing your pension funds any time after age 55, even if you're still working. This is due to a change to age 57 from 6 April 2028. You have several options available when you decide to take your pension.  

You may wish to consider purchasing an annuity that pays a guaranteed monthly income. Enter into drawdown, taking 25% as a tax-free lump sum and leaving the remaining funds invested for the future and then drawdown on the funds as and when you choose to. 

You can also take the whole amount as cash but you must be aware that only the first 25% is tax free the remaining 75% is taxable, therefore you could stand to pay HMRC a substantial amount of the fund in taxes.

Some suggestions that may help when choosing a personal pension

• Shop around to give yourself the widest choice and take the time to get as much information as possible before trying to decide. Compare the products offered by different providers and study the key facts document for each scheme you may be considering.
• Ensure that you can afford the contributions. You may have to commit to a minimum payment and regular contributions and if your income is irregular, you may not be able to satisfy the requirements. Check if it is possible to vary the amount and when you contribute to the scheme, or if you need to commit to regular payments.
• Check any charges that may be payable, including charges for managing your investments, administration fees, transfer charges, and penalties for missed payments or for taking your pension early. Charges for stakeholder pensions are limited to set amounts.
• Study where your funds will be invested and the choices that you may have. It is important to ensure that you are aware and happy with the level of risk you are taking.
• It is also recommended that you seek proper advice from an FCA regulated financial advisor that can utilise their expertise and provide tailor made guidance based on your circumstances to help you make the correct personal pension choice.

 

Get expert advice

Considering all of this, it's very important to seek financial advice before making any decisions. The transfer of a personal pension or group scheme; you cannot reverse your decision. Therefore, any decision needs to be based on a careful, expert assessment of all circumstances. Let Regulated Advice match you with a financial advisor for expert advice.