Active Wealth Limited

Money Purchase Pensions

The pensions listed below are all money purchase pensions:

• Occupational defined contribution pensions – some employers offer these schemes.
• Group personal pensions.
• Stakeholder pensions.
• Individual personal pensions.

How they work

Money purchase pensions build up a pension fund using your contributions (and your employer’s contributions if they make any), plus investment Returns (if any) and tax relief. It helps to think of money purchase pensions as having two stages:

Stage 1: The fund is invested, usually in stocks and shares and other investments, with the aim of growing the fund over the years before you retire. Remember though that the value of investments may go up or down.

Stage 2: When you retire, you can take a tax-free lump sum from your fund and use the rest to secure an income – usually in the form of a lifetime annuity.

A lifetime annuity is an income you buy with your pension fund when you retire. For more information see our guide to lifetime annuities.

The amount of pension you’ll get at retirement will depend on:

• how much you pay into the fund;
• how much your employer pays in (if anything);
• how well your invested contributions perform;
• the charges taken out of your fund by your pension provider;
• how much you take out as a tax-free lump sum;
• ‘annuity rates’ at the time you retire;
• the type of annuity you choose.

The benefits of money purchase schemes are that:

• you get tax relief on your contributions;
• your fund grows generally free of income tax and capital gains tax;
• you may be able to choose the funds to invest in;
• and your employer may contribute if it’s a work-based pension.

Private pensions

If you’ve checked on pension schemes offered by your employer or are self employed and have decided on a private pension, you need to shop around for a stakeholder pension or personal pension.

Stakeholder and personal pensions are money purchase pensions (the pension you get is not linked to your salary).

There are some differences between them.

Stakeholder pensions

Stakeholder pensions must have certain features. Some of these are:

• limited charges;
• low minimum payments;
• flexible contributions;
• penalty-free transfers;
• and a default investment fund – ie a fund your money will be invested in if you don’t want to choose one.

Personal pensions

Personal pensions are similar to stakeholder pensions, but they usually offer a wider range of investment choices.

Personal pension charges may be similar to stakeholder pension charges but some are higher.

High charges deducted from your fund by the pension provider can reduce the growth of your fund. High charges do not necessarily mean better performance.

Active Wealth Ltd can help you compare stakeholder and personal pensions from different Providers.

Self-invested Personal Pensions (SIPPs)

SIPPs are a type of personal pension designed for people who want to manage their own fund.

Most SIPPs allow investment in a very wide range of funds and investments such as commercial property, offices, shops or factory premises.

They often have higher charges than stakeholder and personal pensions. For this reason, they may only be suitable for people who have large funds and are experienced with investing.