Occupational Defined Contribution Schemes

Occupational defined contribution schemes, or money purchase schemes, are operated in the same way as personal pension schemes (see Personal Pensions) which are also money purchase schemes. Occupational pensions (see Occupational Pensions) differ from regular personal pensions in that they are offered and often funded by your employer.

A defined contribution scheme enables you to make regular contributions, of as little as £20, to a pension savings scheme. Your employer will usually also make contributions to your savings. The contributions from you and your employer are invested and the pension scheme provider claims tax relief of 22% on your contributions. When you come to retire, the contributions you and your employer have made, combined with tax relief and investment returns, constitute your pension fund (see Tax Incentives for Saving for more information). You are usually entitled to a tax-free lump sum of around 25% of the total pension fund (see Tax-Free Lump Sum on Retirement). The remaining pension fund will be used to buy an annual pension, or annuity, from an insurance company (see Annuities). For more detailed information on money purchase schemes, see Personal Pensions.

Although the money that you contribute to your pension is invested, you do not normally have to worry about making big losses. Your pension scheme provider should not invest any pension contributions in high-risk situations, and any investments at moderate risk will be carefully managed to ensure that the closer a pension saver comes to retirement, the lower the risk to any investments made. You may find that your occupational pension scheme does not offer you the chance to determine how your pension fund is invested: often occupational schemes are invested by fund managers and not the individual members. For more details on investments, see Other Investment Opportunities. You should remember that wherever investment is involved there is always a risk; be aware that there is always a possibility that the worst could happen, and do not rely on one savings fund to protect you from poverty in retirement.

An occupational pension is a great way to save for the future. Your employer will often arrange for your contributions to be taken out of your salary automatically, so you will not have to worry about remembering to make regular contributions. In general your employer will also make contributions to your savings scheme, so you can save at a lower cost to yourself. Often your employer will negotiate reduced management fees with the insurance company managing the pension scheme, because they are sending them a large number of savers. There are also tax incentives to saving for retirement, as detailed in Tax Incentives for Saving.

You may be allowed to continue contributing to your occupational pension scheme even when you are no longer working for the employer. However, the employer’s contributions will usually stop and you may be required to pay higher fund-management fees. You may be able to transfer your pension fund to another occupational pension scheme when you change your employer, but you will need to check the terms and conditions of your individual policy for details. See also Leaving a Pension Scheme Early. If you already have one or more personal pensions, you may decide not to contribute to your employer’s pension scheme, but you should remember that you may be missing out on the opportunity to save with lower fees and benefit from employer contributions.

For details of defined benefit schemes offered by employers, see Occupational defined benefit schemes.