A contract pension is a collection of individual personal pension plans, grouped together to allow more efficient administration.
A contract pension can be a Group Stakeholder scheme (GSH), a Group Personal Pension (GPP) or a Group Self Invested Personal Pension (GSIPP). Apart from the cap on charges that applies to all investments in a stakeholder scheme, the main difference between the three is the range of investment choices on offer – a stakeholder pension will usually offer the fewest choices, a GSIPP offers the widest choice.
Enrolment into any contract pension will result in the pension provider forming an individual pension contract with your employee.
When is a contract pension the right choice?
As an employer, you can choose how much involvement you want in a contract pension. As a minimum, you must make sure you pay the right contributions for your employees and pay them on time. While we would encourage every employer to carry out ongoing oversight of their scheme, the extent of your involvement is up to you.
Contract pensions generally offer more investment choice to employees. The provider’s investment governance team will decide what pooled funds to offer but this could be hundreds of funds.
In a GSIPP, investments aren’t limited to pooled funds alone. Employees can invest in individual shares or other investments if they wish. An extensive choice of investments is something which might appeal to some employees, while others may be put off making a choice by the number of options on offer. Some schemes offer a core fund range to make choices easier for this group.
Contract pensions all operate tax relief on a relief at source basis. This means that non-tax payers benefit from a 25% bonus added to what they pay in, in the same way as tax payers. This is an important consideration if you have a proportion of employees who don’t earn enough to pay tax.
If you have employees who you think will make contributions out of their own bank account, a relief at source scheme will make this easier too.
You should be aware that higher and additional rate tax payers must remember to claim the extra tax relief they’re due on employee contributions from HMRC if you operate a contract pension.
Each employee owns their own pension pot. They have complete control so can pay more in and take benefits as they wish.
If an employee leaves your employment, they will usually leave your contract pension. Their pension is their own, so they can continue to pay in from their own bank account. This may be useful for employees who leave and become self-employed, meaning they aren’t automatically enrolled elsewhere.
Anonymised data can usually be provided to help an employer’s governance committee – should you choose to have one – with oversight, but individuals are protected by data protection regulations.
Individual ownership means it’s more difficult to make governance changes across all employees. The changes that can be made are documented in agreements between the employee and provider.
On balance, a contract pension places more onus on employees to manage their own pension.
Making your decision
If you decide a contract pension is right for your employees, we recommend that you validate your decision with a suitably experienced adviser. They can also advise who might be the best provider. Employers don’t have identical needs, and different providers will offer different propositions and levels of service. It’s important you choose the provider that’s right for you.