Defined Contribution Pension Schemes

These are best considered as savings plans but with the tax advantages of a pension contract. Contributions are built up with investment returns to provide a “pot” of money at retirement or on earlier death, which can then be used to purchase pension benefits including a tax-free cash lump sum at retirement.

The amount that a member receives at retirement depends on a number of factors: –

  • The amount of contributions paid
  • Investment performance over the period from the payment being made to retirement
  • The market cost of buying a pension at retirement – this can vary considerably depending on economic factors and life expectancy
  • Administration and other expenses.

From the point of view of employers, Defined Contribution Schemes are becoming more popular as the cost is known in advance. However, the employee will not know how much pension will be bought until the time of actual retirement.

Money Purchase Schemes can be: –

  • Occupational pension schemes
  • Retirement Annuity contracts, Personal Pensions or Stakeholder Plans.
  • Some Additional Voluntary Contribution Schemes within Occupational Pension Schemes and all Free Standing Additional Voluntary Contribution Schemes
  • Self Invested Personal Pension Plans (SIPPs)
  • Small Self Administered Pension Schemes (SSASs).