Defined benefit schemes
In a defined benefit scheme, the pension you receive will be based on a fraction of your pensionable earnings (those taken into account by the scheme) at retirement. The size of the fraction is calculated by reference to the length of your service. Commonly used fractions are 1/60th or 1/80th for each year of service. For example, anybody in a scheme based on sixtieths between the ages of 25 and 65 (40 years of service) would be entitled to a pension of 40/60ths or 2/3rds of their final salary (this is the maximum permissible).
Money purchase schemes
A money purchase scheme does not guarantee a set level of pension to you when you retire. Instead, the benefits you will receive are based on the amount of money contributed to the pension fund and the investment performance of the assets into which it is placed. All personal pension plans are money purchase schemes. Many employer provided pension plans are also now money purchase schemes.
On retirement a portion of your fund can be taken as a tax-free lump sum (within permitted limits) and the remainder is used to buy a pension for the rest of your life - an annuity. You may decide if you want to use up part of your fund to give yourself regular increases and/or provide for a pension for your spouse should you die first.
Earnings cap
The maximum earnings on which the pension from an employer provided scheme and contributions to personal pensions can be based is called the 'earnings cap'. A new earnings cap is announced each year in the Budget and implemented at the start of the following tax year.
Personal pension
If you're an employee and are not a member of an employer provided pension scheme or are self employed you may choose to set up a personal pension plan. You can choose what sort of investment you want from those on offer. Personal pension plans always operate as money purchase schemes.
Income drawdown
Income drawdown is one option for putting off purchasing an annuity until you reach age 75. Any income you take out of your fund is taxable. The Revenue limits the maximum income through income drawdown to broadly the same as a level annuity for a single person of your age and sex (single-life flat-rate annuity). The minimum income you may take is 35% of the maximum.