Also known as money purchase schemes, these are a way of building up a private pension fund.
An employee and an employer can both contribute with the contribution from an employer typically being a fixed percentage of the employee’s salary. Contributions into a money purchase pension receive tax relief at the employee’s marginal income tax rate. On retirement, the resulting pot may be turned into an income, usually by buying an annuity or may be left invested to take advantage of the income and capital drawdown rules. Since contributions into a money purchase scheme are invested, the size of the pension pot generated for a retiree is dependent on investment performance.