Pensions: types of pension scheme: introduction
Pension schemes established in the UK are regulated financial products which can be described in various different ways.
Defined benefit scheme
This is a scheme where specific benefits are provided by an employer on a member’s retirement. The most common types are final salary or career average schemes, where a formula is applied based on earnings and the number of years of service. The investment risk in these schemes is with the employer and they have become much less common in recent years with schemes being closed to new members or closed altogether.
Defined contribution scheme
Often called a money purchase scheme, this is a scheme where specified contributions are made into a fund which is then invested. The investment pot is used to provide retirement benefits at a specified point in time. In this case, the investment risk lies with the scheme member.
Schemes can also be categorised as occupational pension schemes (provided by an employer) or personal pension schemes and there are many variations which are briefly described in the following sections.
Schemes can be registered with HMRC in order to receive tax benefits (IHTM17021).
Both scheme members and employers can make contributions into a pension scheme