Money purchase schemes
How they Work
Unlike final salary, money purchase schemes do not give any guarantees with regard to the level of pension income, they do not provide a pension that is linked to your final earnings before retirement. Contributions made by an employee and employer (contributory, non- contributory or a combination of the two) are invested and allowed to grow. The resultant fund is ‘allocated’ to you. Upon reaching retirement, the money that has built up in the pension is used to purchase a pension income.
The value of the pension at retirement is dependent upon:
* How much money has been paid in over the life of the plan
* How well the capital has grown
* The annuity rate available at retirement, (or what level of unsecured income can be achieved)
So a money purchase pension is simply a long term savings plan (albeit a very tax efficient one) that is designed to produce a lump sum at retirement. This is then used to purchase pension benefits one of which is a retirement income.
Company pensions -
money purchase schemes
How they Work
Unlike final salary, money purchase schemes do not give any guarantees with regards to level of income. In other words, they do not provide a pension that is linked to your final earnings before retirement. Contributions made by you and your employer (if it is a contributory) are invested and allowed to grow. The resultant fund is ‘allocated’ to you. Upon reaching retirement age, you use the money that has built up in your pension to purchase an annuity within Inland Revenue limits. It is the annuity which then provides you with income in your retirement. So it follows that the value of the pension at retirement is dependent upon:
* How much money has been paid in over the life of the plan
* How well the money has grown
* What annuity rate your pension fund purchases when you retire.
In other words, a money purchase pension is simply a long term savings plan (albeit a very tax efficient one) that is designed to produce a lump sum at retirement. This then purchases an annuity which in turn provides the retirement income. It follows that unlike a final salary scheme, you are unable to predict with any accuracy what pension you will receive before your retirement date.
The benefits included
The benefits that come with money purchase company pensions do not tend to be as good as the ones associated with final salary schemes. Widow's and dependent children's pensions, death and disability benefits are all quite rare in money