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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
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.
Who is the richest person in the world?
The top five richest people in the world have a combined net worth of $825 billion. Who takes the crown for the richest person in the world?
By Vaishali Varu Published
Top 10 stocks with highest growth over past decade - from Nvidia, Microsoft to Netflix, which companies made you the most money?
We reveal the 10 global companies with the biggest returns since 2013. One firm has posted an astonishing 9,870% return, meaning a £1,000 investment would now be worth almost £82,000.
By Ruth Emery Published