Money Purchase Schemes and Defined Contribution Schemes
A money purchase scheme can be easily confused with a Group Personal Pension scheme, although each is based on separate legislation. For our purposes, we focus on the differences that affect pension scheme members. See also the section below about group personal pensions.
The pension benefits you receive from a money purchase pension scheme are not linked to your final salary, (or even on your career-averaged salary); instead you save up a pension fund by investing the contributions you make, together with your employer’s contributions.
How are your contributions invested?
Often, there is a default investment choice and almost four fifths of money purchase pension scheme members do not make an investment choice themselves therefore, their money is placed into the default investment choice for them. Usually, the default investment choice contains some stockmarket investment element for your younger pension scheme members, and the pension fund is gradually swapped towards cash, or another very low risk fund just before normal retirement age.
That can be ideal. If that suits you, then your pension investment strategy is sorted for you without any intervention from you.
You might want to over-ride the default investment strategy for a few reasons. For example, if you intend to draw the benefits earlier or later than the scheme’s targeted retirement age; if you are very young when you join the scheme and you are happy to take more risks in the early years; if you don’t like the idea of stockmarket risks even if you are young; if you prefer to invest around the world in a different mix than the scheme default option offers.
You may be able to override the default investment destination for your contributions. The larger schemes provide around two dozen funds, including some low- and high- risk options, as well as ethical and shariah law compliant choices. If this is an important matter for you, fill in our enquiry form to get some help.
We are pleased to offer a long-distance service to money purchase pension scheme members; we will provide you with an online login to our risk profiling questionnaire to establish your tolerance for risk. We will then analyse its results and ask you a few extra questions. We will then provide you with a target investment mix and help you to choose the right funds from your pension scheme fund list. Our charge for that service is £150, fill in our enquiry form to get some help.
Usually, the employer bears most of the cost of administering the scheme and its investment management. Also, “economies of scale” apply to the larger schemes so these pensions are usually cheaper contracts than personal pensions.
In our experience, the choice of funds can be more limited than many clients prefer, and there can be quite a time lag before investment instructions are carried out. However, they are usually cheap and an increasing number of schemes can be controlled by the employee online.
Some money purchase pension schemes also negotiate better annuity rates at retirement, whether or not you are still an active scheme member at that time. But sometimes you can still get better rates on the open market. If you’re about to retire, get a free annuity comparison by filling in our annuity enquiry form.
We’re qualified and experienced to look at each pension in turn, to tell you what you need to know about it. We can project what that pension could be worth when you retire and tell you what to do about it. Do you want to know whether you should leave it where it is? or combine it with other pensions you have left behind? or add it to your new employer’s pension? If you would like our help, get in touch.
