Final Salary or Defined Benefits SchemesFinal salary occupational pensions schemes offer a guaranteed pension amount, usually based on salary and time served with an employer.
Typically accrual rates of 1/80th or 1/60th of pensionable salary for each year of pensionable service are found.
E.g. Fred Smith retires on a salary of £20,000pa after 20 years in a 1/60ths scheme. His pension is 20/60 x £20,000 = £6,666.
Money Purchase SchemesWith a Money Purchase occupational pension plan, the pension contributions are invested and the final pension is based on the investment performance of the underlying investment fund. There is no guarantee.
Individual Contributions
Individuals can contribute as much as they wish although there are limits on the amount of contributions that will receive the full benefits of tax relief.
Any contribution that is not paid by the employer is classed as a member contribution even if a third party has made the contribution. Tax relief is given according to the member’s personal tax position.
Employer ContributionsJust like individual contributions, employer contributions are also unlimited. Full tax relief will be available without limit subject to the local inspector of taxes. However, there will be a tax charge on the member where total contributions are above the annual allowance.
Personal and Stakeholder PensionsPersonal pensions, introduced on 1 July 1988, originally aimed to give people who were not part of a company pension scheme their own portable pension, designed on a money purchase basis although since April 2001 certain individuals who are members of company pension schemes can also take out personal pensions.
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