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Occupational defined contribution schemes

Some employers offer these schemes. They build up a personal fund for each employee which is converted into an income at retirement. They are a type of money purchase pension. For more information get a free copy of our Pensions booklet. You can download or order it online – see Publications

The scheme is run by trustees who look after scheme members’ interests and the employer usually contributes to the scheme. The employer deducts your contributions from your salary before it is taxed.

How does it 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 usually invested in stocks and shares, along with 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.

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

  • how much you pay into the fund;
  • how much, if anything, your employer pays in;
  • how well your investments have performed;
  • what charges have been taken out of your fund by your pension provider;
  • how much you take as a tax-free lump sum;
  • annuity rates at the time you retire; and
  • the type of annuity you choose.

For more information about annuities and other retirement options, see Retirement options.

What you need to think about

Think carefully if you are planning not to join your employer's pension scheme. It is not usually a good idea to turn down a pension scheme to which your employer will contribute on your behalf.

Changing jobs

If you change jobs, you stop paying into the pension and can leave it where it is (called a preserved or deferred pension). Alternatively you may wish to transfer it to your new employer, or to a stakeholder or personal pension, but there are risks and costs associated to that. You should take advice if you are thinking of transferring your pension.