What is a Money Purchase Pension? (Also known as Defined Contribution Schemes)
The term ‘defined contribution’ applies to personal pensions, stakeholder pensions, self-invested personal pensions (SIPPs) and some additional voluntary contribution schemes. Further changes took effect from 6 April 2015, increasing flexibility for those taking benefits.
Members can take up to 25 per cent of the value of the fund as a tax-free lump sum. In some cases its beneficial to take this cash depending on your financial situation, the best thing to do is to discuss your needs with a financial adviser to determine if you should draw on your pension.
Another benefit of a money purchase scheme is the remaining balance of your pension (if you decide to take your tax-free cash) can be taken as ‘Flexi-access drawdown’ that is better known as regular income (which is taxable). The funds will remain invested until they are taken and its possible to stop drawing on the pension if you decide you want to keep the money invested. Some old pensions do not offer this facility and it is wise to find out what is possible with your pension so you know your options for retirement.
Another benefit of a money purchase scheme is annuitizing, and it may be decided that annuitizing is the best options for your pension fund. Your pensions fund can be used to purchase an annuity, at either the same time you decide to take tax-free cash (or not). The annuity will provide an income for like. It could be fixed, escalated by a set percentage each year or with inflation, or be investment-linked (with-profits and unit-linked). It is also possible to arrange an annuity that provides a reducing income – designed for those who need extra income earlier in retirement – or one that runs for a defined term rather than for life. A financial adviser will be able to determine if an annuity is a good option based on your circumstances.
To find out more you should talk to a financial adviser to help determine what pension you have and what action you should take, if any, with your pension funds.