What are the two types of company pension scheme? And what are the differences between the two? If these two questions are currently going thru your mind, then good for you, for this article will answer these two questions.
The two types of company pension scheme are money purchase scheme and final salary (or defined-benefit) scheme.
In money purchase scheme, on your behalf, your contributions (and those of your employer) are invested by a professional manager or insurance company. In money purchase knowing in advance the value of your potential pension will somehow be impossible. This is because the value is dependent on the performance of the investment itself.
While in final salary scheme or sometimes referred as defined-benefit, all the money you contribute is placed into a single fund, which will eventually provide for all its retired members. And the value will eventually obtain is based on your salary and your years under the scheme.
Note that under this final salary, it can run out of money, normally when the amount it has promised to pay out in the future – or the amount it has to pay out now – is more than the total value of investment. And when this happens a support is available to compensate its members.