What Is a Defined Contribution Pension?

I’m looking to start up a pension, but all I can seem to find are defined contribution pensions. When my dad retired, his company started paying him a proportion of his salary, but defined contribution pensions don’t seem to offer that. Is a DC pension my only option?

Question asked by Mr A Robbins
15/10/2019

Money Purchase Pensions Explained

Defined contribution or money purchase pensions are a broad range of products which you use for saving money towards a retirement income.

DC pensions can either be arranged by you personally — usually known as a private pension — or by your employer. A private pension involves no contributions from an employer, while both the employer and the employee contribute to an employer defined contribution pension.

How Much Is a Defined Contribution Pension Worth?

The value of your money purchase pension scheme — and therefore to some extent the size of your retirement income — depends on your contributions to the plan and the fund’s investment performance.

Be aware that your defined contribution pension scheme could fall as well as rise in value along with the markets because it depends on the investment performance of the underlying funds.

How much your pension is worth will also depend on number of other factors, including:

  • How much your employer and / or you contribute
  • How long you save for
  • Any charges deducted by your pension provider.

Difference Between Defined Contribution and Defined Benefit Pensions

Your dad probably has a final salary pension or defined benefit pension, which you have to be invited into by your employer. They offer a guaranteed income for life after retirement. There are no such guarantees with a defined contribution pension, which are currently most people’s only option for pension saving given the decline in DB schemes.

Buying a Retirement Income With a Defined Contribution Pension

There are a number of options available for turning your DC pension pot into a pension income. Once you hit the age of 55, you’re able to access this pot of money to buy a retirement income. Your options include:

  • Buying an annuity, where you enter into a contract with an insurance company that agrees to pay you an income for life in exchange for your pension cash
  • Entering into income drawdown, which allows you to take an income from your pension pot; you can take as much or as little as you want, when you want
  • Taking a cash lump sum and / or take some or all of the pension pot and invest it in another way to provide an income.

You can take the first 25% of your pension pot as a tax-free cash lump sum, with the remainder being taxed by HMRC just like any other income. This will be taxed at your highest marginal rate, so be careful you’re not pushed into a higher income tax bracket by withdrawing cash from your pension.

You’ll also have to think very carefully with regards to how long you think you’ll live and how much income you’ll need for the rest of your life. If you choose not to purchase an annuity, the pot of money from a defined contribution pension scheme can run out.

Consider taking financial advice and / or a pensions advice if you have a DC pension pot and you’re approaching retirement. An adviser can discuss your options for buying a retirement income that works for you.

Our Services & Tools

See Your Financial Future
Find > Organize > Simplify
We exist to improve your financial wellbeing

We use clever technology to bring your financial future to life

  • Find, organise and simplify your Pensions, ISAs and other investments.
  • Plan your financial future and put a strategy in place to achieve this.
  • Regularly review how you are doing to make sure you stay on track.

Frequently Asked Questions

Contact Us

Head Office & Pensions and Investments
Senator House
85 Queen Victoria Street
London
EC4V 4AB
Personal Insurance & Accounts Payable
Telecom House
125-135 Preston Road
Brighton
BN1 6AF
Drewberry London Office MapDrewberry Brighton Office Map

If you are unhappy with our service, we have a complaints procedure, details of which are available upon request. If you are unhappy with how your complaint has been dealt with, you may be able to refer your complaint to the Financial Ombudsman Service (FOS). The FOS website is www.financial-ombudsman.org.uk.

Drewberry Ltd is registered in England and Wales. Companies House No. 06675912

Drewberry Ltd registered office: Telecom House, Preston Road, Brighton, England, BN1 6AF. Telephone 0208 432 7333

Drewberry Ltd (Financial Conduct Authority No. 505473) is an Appointed Representative of Quilter Wealth Limited and Quilter Mortgage Planning

Limited, which are authorised and regulated by the Financial Conduct Authority.