A defined Contribution plan is defined in the sense that the contribution is defined, not the benefit. The benefit depends on the amount in the pension and the performance of the investments. There are a number of different types of DC schemes. Essentially a DC scheme exchanges a minimum time commitment for tax relief, requiring money to be held in the scheme until the member is 55.
Defined Contribution Schemes can be built up through your own contributions, those of your employer and tax relief from the government.
Defined contribution schemes give you an accumulated sum when you come to retire that you can then use to create a pension income. You can also take the lot as a lump sum but this could result in a significant tax bill.
The majority of company pension schemes are now defined contribution as most defined benefit schemes have closed to new members.
The amount of retirement income you’ll end up with depends on:
- How much you have contributed
- How much your employer has contributed
- How long you have been contributing
- How the investments performed
- What the charges on the pension are
- If you choose to take any as a commencement lump sum
What types of Defined Contribution schemes are there?
The main types of UK Defined Contribution schemes are as follows:
- Executive pension plan
- Group personal pension
- Master trust pension (eg NEST, NOW pension, the People’s Pension)
- SIPP (Self Invested Personal Pension)
- SSAS (Small Self Administered Schemes)
- Stakeholder pension
There are also QROPS (Qualifying recognised overseas pension scheme) and QNUPS (Qualifying Non-UK pension scheme) but these are overseas pensions typically used by Brits who have moved abroad.