What is an Occupational Money Purchase Scheme?
Occupational money purchase schemes are the other type of work based pension arrangement. The employee and employer agree on a set contribution level during employment, which is usually percentage of salary. The contributions are invested at the discretion of the employee to build up a retirement fund.
The pension at retirement isn’t guaranteed like a defined benefit/final salary scheme, but is based on the value of the ‘pot’ at retirement. The contributions are known rather than the benefits, hence these are referred to as defined contribution schemes.
The vast majority of occupational schemes are now defined contribution as they are favoured by employees as they are generally less expensive to run.
Some occupational money purchase arrangements have ‘safeguarded benefits’ attached. These can include, guaranteed annuity rates or protected tax free cash (which might offer the ability to take more than the usual 25% as a tax free lump sum). It’s therefore important to understand the scheme benefits being offered before transferring benefits away.
Defined contribution schemes allow the employee to take more control during the accumulation stage through picking a level of investment risk that suits their risk appetite. The employee also has more flexibility at retirement through choosing any of the available pension income options such as an annuity or income drawdown.