Money purchase schemes (a type of defined contribution arrangement) are set up by employers to provide an income in retirement for their employees. The employee contributes a percentage of his or her salary into the scheme – contributions are usually deducted directly from the employee’s salary before it is taxed. The employer may also decide (or not) to contribute a specific amount to each employee’s scheme.
In a money purchase scheme, employees’ contributions are invested in stocks and shares and other types of investments by the pension provider (usually an insurance company) to build up a fund, which is used to purchase an income for the scheme member when he or she retires.
If a scheme member moves to a new employer, it is possible for the employee to move their money purchase pension to their new employer’s scheme. Or the employee can leave their money purchase pension with their previous employer and the pension then becomes a ‘preserved’ or ‘deferred’ pension.
The final value of the pension fund and the amount of income the scheme member can expect it to purchase for them, is determined by i) how much has been paid in to the fund ii) how well (or not) the fund’s investments have performed and iii) prevailing annuity rates.
Although employers (private sector only) are responsible for sponsoring their schemes, the schemes themselves are run by boards of trustees, who deal with the payment of retirement benefits and where appropriate any death benefits.