Money Purchase Pension

Are There Any Risks Involved With A Money Purchase Pension?

Money purchase pensions carry less risk for the employer, which is why many are moving from final salary to money purchase. In a money purchase pension, both the employer and the employee pay into the pension fund, which is then invested, usually in the stock market. The fund accrued at retirement is used to buy an annuity, which then provides an annual income to the employee. The value of the fund is reliant on the performance of the stock market throughout the life of the fund, and particularly at the point when the employee retires. If the stock market is at a low, then the pension fund will suffer. In addition, the annuity rates at the time of retirement affect the amount of annual income that the employee can purchase with the fund. Therefore, although the employer is paying into the fund, the employee shoulders the risk. The main risk to a money purchase pension is the change in the investment environment.

In contrast, a final salary scheme is guaranteed by the company, who must ensure that enough funds are available to pay the appropriate benefits to the employee at retirement. Both the employer and the employee pay into the scheme, but the risk is carried by the employer. Many companies that have offered final salary schemes have changed to money purchase pensions because they cannot afford to offer the generous benefits given by their previous scheme.

What Are The Benefits Of Money Purchase Pensions?

Money purchase pensions allow you and your employer to contribute to the scheme, which is invested and managed by specialist investment companies. There is no tax liability on the growth of the fund and when you retire, you can choose to take a percentage of your fund as a lump sum and use the remainder to buy an annuity.

What Are The Risks?

The main risk to a money purchase pension is the change in the investment environment. If your investment is carefully managed, and you retire when the stock market has been performing well, you will have a good pension. If, however, the stock market is low when you retire, you may not get the very most from your pension. Your retirement income is entirely dependent on the state of your investment fund at retirement, and the annuity rates available to you.

How Can I Find Out If Money Purchase Pensions Are Right For Me?

If your employer is switching from a final salary scheme to a money purchase pension, or if you are considering investing in a pension for the first time, you should see an independent pensions adviser before committing yourself. These advisers will be able to talk to you about your circumstances and recommend the pension arrangements that will suit you best. Taking good advice could be the difference between investing in a good pension, and losing your pension fund completely.