Final salary and money purchase pensions

With a money purchase scheme, the size of your pension depends entirely on the value of your fund when you retire.

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.

Recommended

The return of annuities for retirement income
Pensions

The return of annuities for retirement income

Rising annuity rates offer an improving alternative to income drawdown for those looking for an income in their retirement.
22 Jun 2022
High inflation means the end of the “4% rule” for retirees
Pensions

High inflation means the end of the “4% rule” for retirees

High inflation means that it’s time to reassess how much you withdraw from your pension each year if you don't want to run out of money .
14 Jun 2022
Transferring out of your final salary pension could cost you dear
Pensions

Transferring out of your final salary pension could cost you dear

Thinking about transferring out of a final salary pension? It could cost you a lot more than you might think, says David Prosser.
30 May 2022
Private pensions: act early to avoid a big inheritance tax bill
Pensions

Private pensions: act early to avoid a big inheritance tax bill

Frozen inheritance-tax thresholds mean HMRC is taking ever more in death duties. But there are steps you can take to avoid it, says David Prosser.
18 May 2022

Most Popular

Prepare your portfolio for recession
Investment strategy

Prepare your portfolio for recession

A recession is looking increasingly likely. Add in a bear market and soaring inflation, and things are going to get very complicated for investors, sa…
27 Jun 2022
Market crash: have we hit bottom or is there worse to come?
Stockmarkets

Market crash: have we hit bottom or is there worse to come?

For a little while, markets looked like they were about to embark on a full-on crash. And that could still happen, says Dominic Frisby. Today, he look…
27 Jun 2022
What the end of the 1970s bear market can teach today’s investors
Stockmarkets

What the end of the 1970s bear market can teach today’s investors

The 1970s saw the worst bear market Britain has ever seen, with stocks tumbling 70%. Things have changed a lot since then, says Max King. But there ar…
28 Jun 2022