Final salary and money purchase pensions

In a final salary pension scheme, the employer is contractually obliged to pay the employee a percentage of his final salary when he retires, depending on how long he has worked there.

Both employer and employee generally contribute to the pension fund, but the employer shoulders all of the risk: regardless of how well the investments in the fund perform, he still has to pay out a set amount to the employee on his retirement.

With money purchase pensions, the employee makes contributions to a fund, with top-ups from the employer, but there the employee shoulders all the risk. The size of his pension depends entirely on the value of the fund when he retires.

Those with money purchase pensions are hostage to the performance of the markets and to the skills of their pension fund manager.

• See Tim Bennett’s video tutorial: A beginner’s guide to pensions.

MoneyWeek magazine

Latest issue:

Magazine cover
Heading higher?

Or are house prices set to fall?

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

'Would you rather upset God, or have Him just ignore you?'

In the first of three interviews with Merryn Somerset Webb, Hugh Hendry, manager of the Eclectica Fund, talks about what it takes to be a good hedge fund manager – and how he learned to stop worrying and love central banks.


Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.


21 November 1969: The first permanent Arpanet link

A milestone in the formation of the internet, the first permanent Arpanet link was established on this day in 1969 between researchers in the United States.