These are pensions whose performance is largely dependent on the underlying investments though an employer operated scheme may offer it’s employees certain guarantees in respect to the returns received. Unlike defined benefit schemes this does not extend to guaranteeing their annual retirement income. They are available through both company sourced and privately purchased plans.
 
What follows is a look into;

You are given a range of assets in which to place your money. These will cross a wide risk spectrum to allow your investments to be tailored according to your requirements. Typically, there are no guarantees to the level of growth you will receive or how much income this will translate into on retirement.
 
Occupational schemes may offer incentives including life insurance and employer contributions. The latter will normally result in the organisation matching any premiums contributed by a worker up to a pre-determined level
An employer may match an employees contribution up to 5% therefore if an employee earned £2,000 per month gross they would;
 
Contribute £100pm (5%) directly into the pension
Receive a gross salary of £1,900pm on which they pay tax
Receive £100pm from their employer
 
Total monthly pension contributions of £200
 
If they chose to opt out of the pension scheme they would be liable for tax on the £100 that would have otherwise been contributed into the pension. With a tax rate of 20% they would only receive £80pm rather than £200pm in a pension.
 
Another option would be to use salary sacrifice. This is an agreement between an employer and an employee where an employer will pay a fixed rate of contribution into an employee’s pension in exchange for paying them a lower salary. This allows both employer and employee to reduce National Insurance Contributions (NICs) which is another form of tax. This can effect your entitlement to certain State benefits so it is important to receive advice on this matter if it is offered
Defined contribution pension plans follow both general and specific rules set forth by HMRC. These stipulate the exact terms and restrictions each pension scheme must abide by to benefit from the favourable tax treatment afforded to pension investments by the British Government. On the whole, although they differ compared to defined benefit rules & regulations they cover the same broad areas, namely;
 

currently the amount is 25% within the UK and up to 30% offshore via qualified offshore pensions such as QROPS – Both are taxed at a rate of 0% which is why they are commonly known as tax free lump sums

ie no income or capital gains tax is charged within a pension structure, there are tax rebates for contributions made and withdrawals are charged at a person’s marginal tax rate

From April 6th there will be no limit to how much income can be withdrawn from a pension. Without any anti tax avoidance measures it would be possible to reduce your income tax bill by contributing your full salary to a pension and then withdrawing it from there since you would benefit from the commencement lump sum tax free rate

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Pensions, defined contribution (money purchase) schemes
 

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