Glossary · UK
What is Money Purchase Pension?
A pension where contributions are invested to build a pot whose final value depends on contributions and investment returns, not a guaranteed salary-based formula.
Full Definition
A money purchase pension - also called a defined contribution pension - is a scheme where you and often your employer pay in contributions that are invested in funds. The eventual value depends on how much was paid in, charges, and investment performance, so the saver carries the investment risk. This contrasts with a defined benefit (final salary) pension, which promises an income based on salary and service. At retirement you can take a tax-free lump sum (normally up to 25% of the pot) and use the rest for drawdown or an annuity. Contributions benefit from tax relief, and most savers can contribute up to the Annual Allowance of GBP 60,000 in 2026/27. Once you flexibly access a money purchase pot, the Money Purchase Annual Allowance (MPAA) of GBP 10,000 may apply, limiting further tax-relieved contributions. Understanding the type of pension matters because it determines who bears the risk and how retirement income is generated.