Money Purchase

Your employer may offer what is called a “defined contribution” or “money purchase” scheme. If you are a member of a money purchase scheme, your employer may pay a specific amount into the pension for you, or they may contribute a percentage of your salary. You may also be required to make contributions yourself, depending on how the pension scheme is designed.

Individual pension fund

The payments will be put into an individual pension fund, as opposed to a collective pension fund, as is the case with a “final salary” scheme. When you retire, your pension will be based on the value of that fund. If the stock market has fallen and your fund falls in value, your employer is unlikely to make up the difference. Money purchase schemes are cheaper for the employer but have fewer guarantees for the employee. In an employer’s money purchase scheme, the investment grows tax-free, and contributions are eligible for tax relief. When you reach retirement, you can take a quarter of the proceeds as a tax-free lump sum with the remaining fund to be used to provide an income either through an annuity or income drawdown plan.

Transferring your money purchase pension plan

If you change jobs, your money purchase pension plan can be transferred to a new employer’s scheme; however, in many cases, it may be better to leave it to grow in the old scheme. Although you will not be contributing to the old scheme, it will continue to accumulate. It is always a good idea to take financial advice before considering transferring a pension.

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