Occupational pension schemes may be set
up in a number of ways. Typically they are
either on a money purchase or a defined
benefit basis.
Money Purchase
Essentially both the employee and the employer
pay into a pot which is invested in a wide
range of investments. The employee's pension
depends on how well the fund performs. From
2006, at retirement a tax free sum of up
to 25% of the fund may be taken. Prior to
2006 there would be a fairly complicated
calculation to work out how much tax free
cash was available.
More companies are opting for a money purchase
basis to avoid the ongoing commitments
Defined Benefit
These are typically based on the employee
getting a pension based on his salary at
retirement combined with the time they have
worked for their employer. The most standard
form is for the employee to receive 1/60th
of their final salary for each year they
work. It is normally possible to reduce
the pension and opt for a tax free lump
sum. In 2006 this lump sum will be standardised
to a maximum of 25% of the notional fund.
All of this is subject to change with the
new Pensions Act and most of our understanding
will change dramatically. If you have a
company pension on either a final salary
or money purchase basis then it is worth
checking to see if you should ring fence
your benefits as in some cases you may be
better with the existing rules rather than
the 2006 rules.
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