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.