Pensions can seem like complicated business, especially given the number of different types of pension that have appeared over the years. That's why we've put together this handy guide to help you identify the type of pension you might have.
Defined Benefit / Final Salary
These kinds of pensions were most popular before the turn of the millenium, though many public sector schemes, including the Civil Service and NHS pensions, remain open to new members.
With this type of pension, the value of your pension is determined by your salary at the point you leave the scheme, i.e. when you no longer work for the sponsoring employer. In some cases, the calculation is based on your average salary over the period of employment; this is know as CARE - career average revalued earnings.
Defined Benefit schemes are often very generous, and transferring them into a Defined Contribution scheme, such as the Nutmeg personal pension, may result in you losing valuable retirement benefits. With this in mind, Nutmeg doesn't accept transfers of Defined Benefit or Final Salary schemes.
Defined Contribution / Money Purchase
Defined contribution schemes are now the most common pension type open to new members in the UK. If you have an occupational scheme, it's likely that both you and your employer pay a percentage of your salary into your pension pot, hence the alternative name money purchase. These contributions are usually invested in the stock market, and so will benefit from investment returns over time.
If you have a personal pension, you will have probably set this up directly with a pension provider. Like occupational schemes, money saved into a personal pension is often invested in the stock market
There are number of different types of Defined Contribution pension:
Self-invested Personal Pension (SIPP)
This is a type of personal pension. With a SIPP, you make contributions into your pot and then invest them directly into the stock market. With a pure SIPP, you make the individual investment decisions. With a discretionary SIPP, you give authorisation to a wealth manager to make the investment decisions on your behalf for a fee.
This type of employer-sponsored pension was created by the government in 2001, and set minimum standards and a simple structure for companies to administer. These standards included:
- Limited charges
- Charge-free transfers
- Flexible contributions
- Low minimum contributions
- A default investment fund – money is invested into this if you don’t want to choose
When you change jobs, your pot stays invested but your employer contributions stop. You can continue to invest your own money in the Stakeholder pot, leave it, or transfer into another type of personal pension, such as the Nutmeg personal pension.
Group Personal Pension (GPP)
This type of pension is set up by a company for the benefit of its employees. The GPP itself is usually run by a large insurance company, such as Aviva, Legal & General and Royal London, amongst others. As with other employer-sponsored pensions, it's likely that both you and your employer pay a percentage of your salary into your pension pot.
GPP's are usually invested in a unit trust (a collection of stocks and shares) managed by the insurance company.
You can transfer your GPP at any time, but whilst you remain in employment with the sponsoring-employer, it's likely they'll continue to make contributions into the GPP account.
When you change jobs, the GPP is automatically converted into a Private Personal Pension (PPP).
Private Personal Pension (PPP)
As above, a Private Personal Pension is created when you leave an employer who has enrolled you in their Group Personal Pension.
You can continue to invest your own money into a PPP pot, or just leave it invested in the Unit Trust selected by your insurance provider. You can also transfer to your new employer's pension arrangements, or into another type of personal pension, such as the Nutmeg personal pension.
Small Self Administered Scheme (SSAS)
These types of schemes are rare, and are usually created for executives of small director-controlled companies and their family members. They are popular for family businesses, and have a maximum membership of 12. If you wish to transfer a SSAS into the Nutmeg personal pension, please contact us.
Section 32 Policy
The strange name for this type of pension is derived from the section of legislation that created them, the Finance Act 1981. This is a policy or contract bought from an insurance company using funds from a registered pension scheme. The policy provides for an annuity at some point in the future – a deferred annuity contract.
S.32 Policies almost always involve some kind of protected benefit, such as a guaranteed minimum pension (GMP) or an early retirement age, which usually means they are not suitable for transferring to a personal pension. If you are considering tranferring a S.32 policy to Nutmeg, please contact us.
Retirement Annuity Contracts (RACs) / Section 226 Policies
These types of policies predated personal pensions and were closed in 1988, though they were allowed to continue so some are still in existence. They can be transferred into another type of personal pension, such as the Nutmeg personal pension.
Free-Standing / Additional Voluntary Contribution (FSAVC & AVC) Schemes
Additional Voluntary Contribution schemes were introduced to allow members of workplace pension schemes to build up additional pension benefits. They are employee-sponsored schemes. They come in both Defined Benefit and Defined Contribution variants.
Free-standing AVC schemes are not tied to the company, and are policies that were offered by insurance companies. These fell in popularity after 2006 when personal and stakeholder pensions were introduced.
Defined contribution AVC schemes and almost all FSAVC schemes can be transferred to a personal pension, such as the Nutmeg personal pension.