What is a defined contribution pension?
A defined contribution pension (sometimes referred to as a money purchase pension scheme) is a type of pension scheme where the pension pot is based on how much money is paid into the scheme. This is markedly different to a defined benefit pension schemes which usually relates to workplace pensions where the pension provider promises to give you a certain amount each year when you retire.
A defined contribution pension can be a company or private pension. The pension pot is based on monies added by you and / or your employer. This money is invested by the pension provider. The final return with these pensions is not guaranteed and the value of the pension pot can go up or down depending on how investments perform.
There are three main options available at retirement, lifetime annuity, flexi-access drawdown and a lump sum payment. These options can be used on their own or in combination. The first 25% drawdown is tax-free and the remainder is taxed at the individual’s marginal rate.
There are no overall limits to employer or employee contributions and no upper limit to the total amount of pension saving that can be built up. However, there are limits that affect tax relief on pension contributions including an annual and lifetime allowance.
No Advice
The content produced and presented by Streets is for general guidance and informational purposes only. It should not be construed as legal, tax, investment, financial or other advice. Furthermore, it should not be considered a recommendation or an offer to sell, or a solicitation of any offer to buy any securities or other form of financial asset. The information provided by Streets is of a general nature and is not specific for any individual or entity. Appropriate and tailored advice or independent research should be obtained before making any such decisions. Streets does not accept any liability for any loss or damage which is incurred from you acting or not acting as a result of obtaining Streets' visual or audible content.
Information
The content used by Streets has been obtained from or is based on sources that we believe to be accurate and reliable. Although reasonable care has been taken in gathering the necessary information, we cannot guarantee the accuracy or completeness of any information we publish and we accept no liability for any errors or omissions in material. You should always seek specific advice prior to making any investment, legal or tax decisions.
Share this article