What is a defined contribution pension?
A defined contribution (DC) pension is the most common type of pension. On retirement, the amount your defined contribution pension is worth depends on how much money you’ve contributed and the performance of your investments. Most modern workplace and personal pensions are defined contribution pensions.
Building up your defined contribution pension
While a defined benefit pension usually pays you a retirement income based on your salary while you were working, a defined contribution pension works more like a tax-friendly savings account.
You pay money into your pension pot, and your employer can contribute too. Your pension provider claims tax relief on your behalf and adds it to your pension pot. Your pension provider usually invests the money in several asset categories including shares, property, bonds and cash.
You can use our online pension calculator to figure out your projected retirement income, based on how much money is in your pension pot and how much you’re contributing.
Withdrawing money from your defined contribution pension
When you retire, as long as you’re at least 55 you have several choices for what to do with your defined contribution pension. You can withdraw up to 25% of your pot as a lump sum without paying tax. You can leave the rest invested or use the money to buy an annuity, which guarantees to pay you an agreed income, either for a specified period or for the rest of your life.
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
Updated: 22nd August 2020