There are two kinds of company pension scheme, into which you and your employer may make contributions. A final salary scheme pays a retirement income related to the amount you are earning when you stop work, while a money purchase scheme instead reflects the amount invested and the underlying investment fund performance. In both cases, you will have access to tax free cash as well as to the actual pension.
The impact of stock market downturns has taken its toll on pension funds. Losing the effect of the compounding of investment growth – coupled with much lower annuity rates – has resulted in many final salary schemes losing value and as a consequence being underfunded.
This has led to the decision to close them to new entrants, or even to offer alternative pension arrangements to existing members. As a consequence where companies now provide company pensions these are now almost entirely based on ‘money purchase’ arrangements, under which no guarantee of the eventual pension available is made.
Those already in company pension schemes should be aware that the rate at which contributions can be made by the member is now limited to the greater of £3,600 and total UK relevant earnings, subject to scheme rules. Where your employer contributes on your behalf there is no earnings related limit, and only the annual limit applies.