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  Occupational pensions

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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