A defined contribution pension is a type of retirement savings plan where you make contributions into an individual pension pot in your name. Alternatively it might be that you have a workplace pension that is a defined contribution pension. The amount you receive in retirement depends on how much has been contributed and how well the investments within the pension have performed over time.
Key Features of a Defined Contribution Pension
- Contributions: You pay a percentage of your salary into the pension pot. If it is a workplace pension, your employer may also contribute. The government typically adds tax relief to your contributions, boosting your savings.
- Investment Growth: The money in your pension pot is invested, usually in a range of assets like stocks, bonds, or funds. The value of your pension pot can go up or down depending on the performance of these investments.
- Retirement Income: When you reach retirement age, the amount in your pot is used to provide your retirement income. You have options, such as taking a lump sum, setting up a drawdown arrangement to take income as needed, or purchasing an annuity for guaranteed income.
Unlike defined benefit pensions, where your retirement income is pre-determined, the value of a defined contribution pension is not guaranteed and depends on investment performance and the choices you make at retirement.
