Pensions are complicated, particularly so when you consider the number and variety of pension types that have appeared over the years. Unclear which category your pension falls into? We’ve put together a handy guide to help identify what type of pension you have.
What is a defined benefit pension?
These types of pensions were most popular before the turn of the millennium, 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 a number of factors:
- How long you’ve worked for the company – or “sponsoring employer”
- Your salary while working. Either your final salary or an average of your salary over your career; this is known as CARE – career average revalued earnings
- The accrual rate: mostly expressed as a fraction or percentage of your pensionable salary, it is the proportion of your salary you’ll get as an annual retirement income
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.
For customers with a defined benefit pension valued at less than £30,000
These can be transferred to Nutmeg without financial advice. You must sign a declaration stating that you are aware of the product features you’ll be losing and remain comfortable transferring.
For customers with a defined benefit pension valued at £30,000 or more
You must obtain specialist financial advice before transferring. A suitable adviser can be found through the government’s Money Advice Service retirement adviser directory.
With this in mind, Nutmeg doesn’t accept defined benefit pension transfers from local authority pensions or the Universities Superannuation Scheme.
What is a defined contribution pension?
Defined contribution schemes are now the most common pension type open to new members in the UK. They broadly fall under two categories: occupational schemes and personal schemes.
With 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, and so they could benefit from potential investment returns over time. They include:
- Stakeholder pension
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 include:
· 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 scheme is run by a pension provider chosen by your employer, however your pension is an individual contract between you and the provider. As with any other employer-sponsored pension, it’s likely that both you and your employer pay a percentage of your salary into your pension pot.
GPPs are usually invested in a unit trust (a collection of stocks and shares) managed by the pension provider.
When you change jobs, the GPP is automatically converted into a Private Personal Pension (PPP).
- 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 the number of members is generally no more than 11. If you wish to transfer a SSAS into the Nutmeg personal pension, please contact us.
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 usually invested. The Nutmeg personal pension falls under this category. Unlike a SIPP (more below), we invest your pension on your behalf, and you can open a Nutmeg pension as well as, or instead of, an employer scheme. They include:
- Self-invested Personal Pension (SIPP)
A SIPP is a type of personal pension. With a SIPP, you make contributions into your pension pot and 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.
- Private Personal Pension (PPP)
As above, a Private Personal Pension is created when you leave an employer who has enrolled you in a Group Personal Pension.
You can continue to invest your own money into a PPP pot, or just leave it invested in the Unit Trust, which is usually selected by your pension provider.You can also transfer to your new employer’s pension arrangements, or into another type of personal pension, including a Nutmeg personal pension.
- Section 32 policy
The unusual name derives from the section of legislation used to create them under the Finance Act 1981. Most have been superseded by personal pensions since they were introduced in 1988.
The policy or contract is bought from an insurance company using funds from a registered pension scheme.
Section 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 transferring a Section 32 policy to Nutmeg, please contact us.
- Retirement Annuity Contract (RAC)
These types of policies predated personal pensions and were closed in 1988. A Retirement Annuity Contract was essentially a personal pension for the self-employed and those not offered a workplace pension. Some still exist, and 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 and come in both defined benefit and defined contribution variants.
Free-standing AVC schemes are not tied to the company – instead they are offered by insurance companies. The popularity of these schemes declined 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, including our personal pension.
Why choose a Nutmeg pension?
Contributing to a pension could greatly improve your quality of life after work. How much depends on what you’re willing to contribute and how your investments perform. That second part is where we come in…
At Nutmeg, we don’t hide behind complex pricing structures or financial jargon. We keep it simple. We give you 24/7 access to your account and keep regular contact to explain where your pension is invested and how it’s performing.
Start with just £500, choose your investment style and a risk level that works for you. Our in-house investment team will then manage a globally diversified portfolio on your behalf.
Open a Nutmeg private pension online in minutes or transfer an old pension and we’ll automatically add the 25% tax relief from HMRC the moment you make a contribution.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. A pension may not be right for everyone and tax rules may change in the future. Please note that during any transfer, your investments will be out of the market. If you are unsure if a pension is right for you, please seek financial advice. Tax treatment depends on your individual circumstances and may be subject to change in the future.