Retirement:
Defined contribution schemes

The vast majority of pension schemes offered by employers are defined contribution schemes. Defined contribution schemes are more commonly referred to as Money purchase schemes. You decide how much you want to contribute to the scheme, usually on a monthly basis, and your benefits at retirement depend on how much you contribute and how the investments bought with your contributions perform. You can vary how much you contribute as often as you like. Your employer can also contribute to the scheme and in most cases does.

Contributions

Since 6 April 2006, contributions are subject to "annual allowance" rules. This is the level of contribution you can make each year that will benefit from tax relief. Tax relief can be obtained on personal contribution of up to �3,600 or 100% of earnings, up to the annual allowance limit. Total contributions including employer payments can exceed 100% of earnings but cannot exceed the annual allowance. However, contributions must be deemed a "wholly and exclusive" business expense by the local inspector of taxes. In the 2006-2007 tax year this is �215,000. This rises by �10,000 per annum to �255,000 in the 2010-2011 tax year.

The pension benefits available

The benefits paid at retirement depend upon the value of the fund at that time. So contribution levels and investment growth are critical to the pension benefits at retirement.

Before A-Day a defined contribution occupational scheme would allow a pension commencement lump sum (PCLS) of up to 1.5 times salary. Since A-Day the maximum PCLS is 25% of the fund value, with the residual fund being used to provide an income. In certain cases where you were a member of one of these schemes prior to A-Day, and your PCLS is greater than 25%, it is possible to protect this.

Some employers' money purchase schemes pay pensions from their own resources but most provide their members' main retirement benefit through buying an annuity. This means the retirement income will also depend on the annuity rates at the time the annuity is bought as well as how the fund has performed up to retirement. It is possible to opt for a reduced annual pension to pay for options such as an increasing pension, a dependant�s pension or a guaranteed period of payment.

Related literature:

What is an annuity?

The tax rules allow members of money purchase occupational pension schemes the flexibility to defer purchasing an annuity until age 75 and instead draw an income from the pension fund directly. Not all schemes offer this unsecured income/pension fund withdrawal facility. There are limits for the amount you can take each year based on the annuity you could otherwise have purchased.

Related literature:

Pension fund withdrawal

What happens if I leave the scheme?

If you leave your employer�s money purchase scheme you will usually have the following options:

to leave your pension fund where it is to continue to benefit from investment growth (but without further contributions) until your reach your normal retirement age, or

to transfer the value of your pension fund to another pension scheme.

It is important to take professional advice as to the best option for you. If you are no longer contributing to a pension fund with a high level of management charges, these charges can seriously erode your ultimate pension benefits particularly if the scheme has poor investment growth. If you wish to transfer your pension fund to another pension scheme your original pension fund holder may impose substantial penalties reducing the fund available to transfer.

What happens when I die?

The actual death benefits will depend on the scheme rules but the maximum allowable benefits are:

If you die before you retire the full value of your fund can be paid to your beneficiaries. However, if the value of the fund is greater than the lifetime allowance and there is no transitional protection in place, a tax charge of 55% will be applied to the excess.
If you die after you retire it will depend on the type of pension purchased. If you did not include options to allow for benefits to be continued after your death the pension will simply cease.

If you die during income drawdown from a money purchase occupational pension scheme, the benefits paid depend upon whether the scheme was contracted out.

Income drawdown can be guaranteed, often for 5 years. If you die before the end of any guaranteed period and your scheme is not contracted out, your spouse/dependants can receive a single lump sum representing any unpaid income drawdown instalments covered by the guarantee and/or annuities (subject to the limits set out above). However if your scheme was contracted out the lump sum option is not available to your spouse.

If your income drawdown is not guaranteed, or you die after the guarantee has ended, the options for your dependants are: