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.

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 reach retirement, 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.

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.