8th July 2021
Money Purchase Pensions
A money purchase pension allows to you build up a pot for retirement. Your eventual pension will depend on:
Your pension works like any other investment account, although with added tax benefits:
If your pension loses money, your retirement income could be affected. However, if the pension or the fund was mis-sold to you, or if there was any fraud involved, your pension is protected by the Financial Services Compensation Scheme.
There are several different types of money purchase pension, which are explained below.
Stakeholder pensions were introduced in 2001. The goal was to encourage more people to save for their retirement, particularly those on lower earnings.
Stakeholders work as follows:
Personal pension is a wide definition. It can include plans offered by insurance companies or platforms. The fund choice can range from a handful to several thousand.
Charges also vary. Some insured pensions simply charge the cost of the fund. This is normally higher than if you bought the equivalent fund on a platform, as the life company’s charges are bundled together with the fund charges. This can make your total charges easier to understand, but it is not always clear how much you are paying for each component.
Platforms charge separately for each element of their service. This will include the platform fee, which is often discounted when your fund value reaches a certain level. Pension wrapper costs and trading charges may also apply.
But platforms offer a huge selection of funds, usually at a very competitive cost. By opting for a platform-based personal pension, and a range of passive funds, the total charges can rival a Stakeholder.
However, if you need a bit more choice or prefer an active management style, the fund choices can accommodate that. You will just pay a bit more in charges.
Self-Invested Personal Pension (SIPP)
A SIPP allows you to invest in an even wider selection of investments. This can include:
In recent years, the lines between personal pension and SIPP have blurred. A platform based personal pension can allow you to invest in funds and shares, and could meet your needs just as well as a SIPP.
A full SIPP usually charges a fixed annual fee, and could be for you if you want to invest in commercial property or private equity. But this is likely to suit a minority of investors.
Some companies offer a hybrid option, with different levels, ranging from insured personal pension to full SIPP. You only pay for the elements you use and can ‘unlock’ different levels depending on your requirements.
Since 2012, all businesses are required to offer a pension to their employees. The requirements are:
You can find out more about workplace pensions here.
Occupational Money Purchase Pension
An occupational money purchase pension works in a similar way to a personal pension. There are often added benefits, for example:
Schemes are normally managed by a third party administrator rather than a platform or insurance company. Fund choice is often limited, and in some cases the funds are unique to the scheme or the employer.
Money purchase pensions can be moved between different providers, and even into different types of pension, for example from a Stakeholder to a SIPP. It’s important to review your existing contract to make sure that you are not losing any valuable guarantees.
Occupational Defined Benefits Pension
Defined benefit pensions are rarely offered these days, unless you are employed by the public sector. They differ from money purchase pensions, as your retirement income will depend on:
You will need to contribute to your defined benefit pension, but ultimate responsibility for covering the cost falls on your employer.
The underlying assets of the scheme are invested in the same way as a money purchase pension. The difference is that if the investments lose money, the employer needs to make up the difference.
If the scheme fails and the employer can’t cover the cost, pensions are covered (up to certain limits) by the Pension Protection Fund.
Please don’t hesitate to contact a member of the team to find out more about the different pension options.