What is a defined contribution pension?
Defined contribution (DC) pensions are investment backed schemes and enable you to set aside money to build up a pension pot. You'll normally be able to access your savings once you turn 55.
The size of your pension pot will depend on how much you pay in and how the investments perform. These plans can be set up by yourself as a personal pension or through an arrangement set up by your employer. The value of your pension pot will depend on:
- How much you've paid in
- How long you've been paying in
- Annuity rates (if relevant)
- How much has been taken in charges
- How well the investment has performed
- What you do with your pension pot
Things to consider
The money is most likely to be invested by a pension provider chosen by your employer.
- As you reach retirement age certain schemes will gradually move your money into lower-risk investments, but it may not happen automatically. You may need to ask your pension provider.
- In the short term the value of your pension could increase or decrease, but pensions usually grow more than savings accounts over the long term.
What is a defined benefit pension?
DB pensions sometimes known as ‘final salary’ or ‘salary-related’ pensions, are only offered through an employer. The pension you receive is based on the pension scheme rules, but is mostly influenced by your salary and your length of service. The amount you'll get depends on:
- How long you've worked for the employer and your salary in the last year (or over a number of years) as an active member.
- Why you're accessing your pension pot (retirement, early payment etc).
Things to consider
- Unlike defined contribution schemes, the amount you’ll get is guaranteed, and will automatically be paid to you.
- You’ll usually be able to get 25% tax free and the rest as regular payments.
- These schemes are run by trustees who look after the interests of the scheme’s members.
Any references we make to taxation are based on our understanding of current legislation and HM Revenue & Customs practice, which can change.
Are you thinking of transferring or consolidating your pension pots?
If you're looking to transfer or consolidate your pensions, check out our useful articles on pension consolidation and pension transfer.
We do recommend you seek expert pension advice, especially if you’re considering transferring your defined benefit pension to make sure you’re not losing out on important benefits.
If advice isn't for you, MoneyHelper offer pension guidance which can help you find out what you can do with your pension pot, how to shop around and what to look out for with taxes and fees. It is available to anyone over age 50 with a defined contribution pension. You can talk to someone over the phone or face to face.
For more information visit MoneyHelper or call them on 0800 138 3944.