Final salary pensions and money purchase schemes

Final salary pensions and money purchase schemes are two types of private pension plans offered by employers. But how do they differ?

With a final salary pension scheme (otherwise known as a 'defined benefit' scheme), the employer is contractually obliged to pay the employee a percentage of their final salary when they retire, depending on how long they have 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 company's fund perform, the employer still has to pay out a set amount to the employee on their retirement. For the employee, this has the advantage of providing a guaranteed retirement income. This is now a rare type of pension. When you can take your pension pot depends on your pension scheme’s rules – it’s usually 55, at the earliest.

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