Money Purchase Schemes for Occupational Pensions
Also known as Defined Contribution (DC) Schemes, Money Purchase Schemes are a type of occupational pension fund where you build up a personal money fund based on your contributions, your employer's contribution, plus investment return. This fund is then ultimately used to provide pension benefits; the amount you receive when you retire depends on the total amount of money you and your employer have paid into the scheme, and how the investment has grown. However, like all investments, the fund value may go down as well as up. These schemes may ask you to make an investment choice, although many will offer a 'default' investment if you do not want to make an investment decision yourself.
How Much Will You Get?
When you retire, you can take some of your pension savings as a tax-free lump sum (up to 25%), and use the rest of the fund to either pay you a pension or buy you an annuity to give you a regular income. The amount of pension income you'll get will depend on:
- how much you pay into the fund
- how much your employer pays into the fund
- what charges are taken out of your fund by your pension provider
- how well your investments have performed
- how much you take as a tax-free lump sum;
- the type of annuity you choose
- annuity rates at the time you retire
What Happens If You Change Jobs?
If you leave the company, you will stop paying into the pension, and provided you have been in the scheme for 2 years or more, then the benefits in the scheme can be left as a deferred (or preserved) pension. Alternatively, the pension could be transferred into another scheme (such as another occupational pension scheme or to a stakeholder or personal pension), although there are risks and costs associated to that process. It is always a good idea to take financial advice before considering transferring a pension.
