In broad terms a company pension can be explained as a pension which is established by a company to accommodate the pension needs of its employees. There are two types of company pension. There is a contributory company pension, in which the pension contribution is automatically taken out of the employee's salary, before tax and to which the employer can choose to match this contribution with their own. There is also the non-contributory company pension, in which the company contributes the payment towards the pension on the employee's behalf.

Final Salary Explained

The final salary company pension scheme offers the employees a proportion of their salary at the time of retirement. This figure is normally calculated as one sixtieth of the employee's salary multiplied by the number of years they have been employed within the organisation. This company pension has frequently appeared in the press recently as many larger UK firms have closed this company pension to new employees and in some cases have frozen the pension of existing employees. This has occurred as the risk of this type of pension lies with the employer and not the employee.

Money Purchase Explained

With the money purchase company pension, the actual pay-out sum on retirement is directly attributable to the amount of money the employee has paid in, how well the investments perform and the annuity rate. Unlike the final salary company pension, the risk lies with the employee.

Final Salary v. Money Purchase.

Although the headlines keep drawing our attention to the fact that many companies are moving away from the final salary company pension towards the money purchase, it would be dangerous to automatically presume that you are better off with a final salary scheme rather than a money purchase. In fact, even though it is generally accepted that the move away from final salary schemes is not in the best interest of the employee's future, there are individuals who may be better off under a different scheme anyway. It will depend on an individual's circumstances. For example, a person who changes their employer every year may be much better off with a money purchase scheme as it could provide them with greater flexibility. It is always best to discuss your personal situation with an experienced and unbiased financial adviser in order to decide which company pension is the most suited to your circumstances.