With job security becoming a thing of the past, make way for the portable pension pot

Patrick Collinson looks at Peter Lilley's idea for the pension plan of the future

A recent speech by Peter Lilley, the Social Security Secretary, will affect millions of people. It concerned pensions and the problem of how small employers can meet demands to provide some sort of retirement safety net for their staff.

Mr Lilley's touted solution is group personal pensions, which the Government now hails as the pensions answer for the 1990ss Though sold as the answer for people who hop between jobs, are they just another way for companies to cut costs and leave employees without a decent pension? GPPs are pensions offered by an employer but which belong to employees, who, ideally, can carry their "retirement pots" with them as they switch jobs.

Peter Lilley's speech marks an attempt to put GPPs firmly at the top of the pension agenda. But in the wake of the pounds 3bn personal pensions misselling scandal, are they the way forward for you?

Employers have a range of options when deciding what pensions to offer. In final salary schemes - the 'Rolls-Royce' of pension schemes - your pension depends on your pay at, or near, retirement.

With group money purchase schemes, sometimes known as 'defined contribution' plans - both employees and employers pay contributions, but your pension depends on how well the invested contributions grow and how much the investment will buy at retirement.

These have soared in popularity among employers, as they take away the risk that the employer will have to make up any shortfall if the pension investments do not grow rapidly enough. But they cannot offer a guaranteed pension of two-thirds of your retiring salary in the way that the best final salary schemes can.

Both these are generally too complex and expensive for small companies and are not suited to the new world of job mobility. If you leave your job, you will need to obtain a value of your pension on that date, then either transfer it to another scheme or leave it with your former employer and waituntil retirement for payment.

David Dunn, head of product marketing at pension specialist NPI says: "Many companies stick with their final-salary schemes in the belief that it is better for their employees, but is that necessarily the case? Changes in employment patterns mean that very few of us will stay with one company throughout our career.

"I suspect that the future is with group personal pension schemes. From an employee's perspective, it is about ownership and control - it is their pension plan and not the employer's."

Fans of GPPs say that not only are they a simple and portable answer to job mobility but that they also enable a small company to at least offer some sort of pension where none previously existed. In doing so they also give small employers an extra tool to attract and retain key staff.

Yet the opponents of GPPs are numerous, and many fear a new wave of mis- selling matching the individual personal pension mis-selling scandal. Chief among their concerns is whether an employer will use a GPP as an excuse to cut the costs of pension provision.

Typically final salary and money purchase schemes offer a contribution from employers of at least 5 per cent of salary, with a similar amount put in by the employer. Anyone offered a GPP should check that their employer is putting money into the scheme, and at a decent rate. A 2 per cent contribution makes a GPP a very poor relation of final salary schemes.

GPPs also place investment choices firmly in the hands of the individual. Employers setting up a GPP usually use an independent adviser, but the level of advice and service to the employee varies sharply according to the fee the employer pays. Penny-pinching companies may be tempted to go for a cut-price option that leaves employees without sufficient advice.

GPPs have a role to play for smaller companies and for skilled workers and professionals happy to hop between job contracts. Longer-term employees barred entry to a final salary scheme and offered a GPP instead may find that rather than taking control over their pension they have added yet another layer of insecurity to their lifestyle.

But for millions of others, whose employers have been unwilling to make any contribution towards their retirement, a GPP may seem ideal. As long as they can persuade their boss to set one up in the first place.

Patrick Collinson is editor of Money Marketing, a weekly newspaper for independent financial advisers.

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search
Logos for the 'Big Six'; energy companies (top row from left) British Gas, EDF, RWE npower, (bottom row from left) SSE, E.ON and ScottishPower

Winter heating underpayment brings summer pain

One reader’s monthly direct debit charge has been increased by 62 per cent

Almost 15,000 people died last winter through living in cold homes that they couldn’t afford to heat

Social tenants locked into energy tariff for 40 years

Many Londoners who live in social housing estates are not allowed to switch because their landlord has ‘locked’ them in to buying from one supplier

Will your credit card rewards be scrapped following new EU rules on charges?

Providers are unhappy with new EU rules - but ultimately it is customers who will have to foot the bill
There remain more than a million unclaimed Premium Bond prizes worth collectively around £48m

Have you won £1m in the May Premium Bonds draw?

More than £60m was paid out to more than 2 million prizewinners this month

The 0 per cent introductory deals that credit cards offer are one of the most odious tricks

Beware credit card firms’ odious tricks

Why can’t we just have open and honest charges, without all the cross-subsiding?

The pound’s recent strength against the euro could be hit by economic uncertainty under a new government

How planning can make your travel cash go further

With the pound at a high against the euro, it pays to buy now before uncertainty post-election

Put the phone down on the coldcallers who see pension liberation as an opportunity to liberate your pension from you

Pension freedoms: How to deal with cold calls from scammers

Sean O'Grady offers advice on keeping your money safe
Switching to a better bank account is much easier than it used to be

More people are switching current accounts – but what do the figures mean?

Experts disagree about the 7% increase over the past year

The chance of getting what appears to be free money can be hugely attractive, especially to first-time buyers who can be fooled into thinking it’s extra cash to buy the essential new items they need for their dream home.

Beware the boom in cashback mortgage deals

Too many mortgages are being sold with misleading gimmicks

The firm’s revenues slumped by a third to £217 million in a disastrous 2014

Wonga results could get even worse this year, chief admits

The firm’s revenues slumped by a third to £217 million in 2014

The cost of a buildings policy has dropped by 10.1 per cent over the year, with the cost of a contents policy falling by 8.2 per cent

Simon Read: Mild winter cuts the cost of home insurance

The average quote for a buildings and contents policy has fallen by 3.6 per cent

Don't count your retirement money yet: employers will stop receiving a pension rebate next year and their staff may lose out

Defined-benefit pension schemes: Rebate change in 2016 may leave you out of pocket

Employees in defined-benefit schemes are held up as the lucky ones, but the state pension scheme will be overhauled in April 2016
Labour will raise the national minimum wage to more than £8 an hour by October 2019 (EPA)

Barclays new Blue Rewards hands cash to customers. What’s the catch?

Joining Barclays Blue Rewards costs £3 a month but then lets customers in for handouts of up to £15 a month

New research reveals that despite the recovering economy, four out of five low-income households have seen no sign of their financial situation improving

Hard-up families could be eligible for financial help

A charity is urging anyone struggling financially to see if they could get help from the state

When is the best time to buy foreign currency?

Video: With an election looming, a hung parliament could hit sterling

  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Editor-in-chief - Financial Services - City, London

    £60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...

    Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

    £25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

    Guru Careers: Management Accountant

    £27 - 35k + Bonus + Benefits: Guru Careers: A Management Accountant is needed ...

    Guru Careers: Project Manager / Business Analyst

    £40-50k + Benefits.: Guru Careers: A Project Manager / Business Analyst is nee...

    Day In a Page

    General Election 2015: ‘We will not sit down with Nicola Sturgeon’, says Ed Balls

    'We will not sit down with Nicola Sturgeon'

    In an exclusive interview, Ed Balls says he won't negotiate his first Budget with SNP MPs - even if Labour need their votes to secure its passage
    VE Day 70th anniversary: How ordinary Britons celebrated the end of war in Europe

    How ordinary Britons celebrated VE Day

    Our perception of VE Day usually involves crowds of giddy Britons casting off the shackles of war with gay abandon. The truth was more nuanced
    They came in with William Caxton's printing press, but typefaces still matter in the digital age

    Typefaces still matter in the digital age

    A new typeface once took years to create, now thousands are available at the click of a drop-down menu. So why do most of us still rely on the old classics, asks Meg Carter?
    Discovery of 'missing link' between the two main life-forms on Earth could explain evolution of animals, say scientists

    'Missing link' between Earth's two life-forms found

    New microbial species tells us something about our dark past, say scientists
    The Pan Am Experience is a 'flight' back to the 1970s that never takes off - at least, not literally

    Pan Am Experience: A 'flight' back to the 70s

    Tim Walker checks in and checks out a four-hour journey with a difference
    Humans aren't alone in indulging in politics - it's everywhere in the animal world

    Humans aren't alone in indulging in politics

    Voting, mutual back-scratching, coups and charismatic leaders - it's everywhere in the animal world
    Crisp sales are in decline - but this tasty trivia might tempt back the turncoats

    Crisp sales are in decline

    As a nation we're filling up on popcorn and pitta chips and forsaking their potato-based predecessors
    Ronald McDonald the muse? Why Banksy, Ron English and Keith Coventry are lovin' Maccy D's

    Ronald McDonald the muse

    A new wave of artists is taking inspiration from the fast food chain
    13 best picnic blankets

    13 best picnic blankets

    Dine al fresco without the grass stains and damp bottoms with something from our pick of picnic rugs
    Barcelona 3 Bayern Munich 0 player ratings: Lionel Messi scores twice - but does he score highest in our ratings?

    Barcelona vs Bayern Munich player ratings

    Lionel Messi scores twice - but does he score highest in our ratings?
    Martin Guptill: Explosive New Zealand batsman who sets the range for Kiwis' big guns

    Explosive batsman who sets the range for Kiwis' big guns

    Martin Guptill has smashed early runs for Derbyshire and tells Richard Edwards to expect more from the 'freakish' Brendon McCullum and his buoyant team during their tour of England
    General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

    Miliband's unlikely journey from hapless geek to heart-throb

    He was meant to be Labour's biggest handicap - but has become almost an asset
    General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

    On the margins

    From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
    Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

    'This is the battle of young Egypt for the future of our country'

    Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
    Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

    Why patients must rely less on doctors

    Improving our own health is the 'blockbuster drug of the century'