Defined Contribution (Money purchase) Schemes
Unlike final salary, money purchase schemes (often called defined contribution schemes) do not provide any guarantees with regard to the level of your eventual pension income and have no link to your final earnings before retirement. It is fair to say that what you put in is very much linked to what you’ll get out, coupled with the longer you can keep your money invested will improve your pension significantly.
Contributions made by both the employee and the employer, together with tax relief on the employee contributions are invested and allowed to grow tax free. The resultant fund is yours and when you reach 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, how long the money has been invested, how well the capital has grown and the annuity rate available at retirement or the level of unsecured income that can be achieved.
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. Your savings are then used to purchase pension benefits for which there is now considerable flexibility in how the savings can be used. See New Rules About Pensions.
Please do not hesitate to contact us if you would like to discuss your retirement options in more detail. Remember we offer a free no obligation consultation and will be happy to help if we can.
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