Defined Contribution Pension Scheme

A Defined Contribution pension scheme can be a variety of different types of workplace pension schemes.  With a defined contribution pension, you build up a pot of money that you can then use to provide an income in retirement. Unlike defined benefit schemes, which promise a specific income, the income you might get from a defined contribution scheme depends on factors including the amount you pay in, the fund’s investment performance and the choices you make at retirement.

Your defined contribution pension builds up a pension pot using your contributions and your employer’s contributions (if applicable), and tax relief on your contributions. If you’re a member of the scheme through your workplace, then your employer usually deducts your contributions from your salary before it is taxed. If you’ve set the scheme up for yourself, you arrange the contributions yourself.

Membership of this type of scheme offers an immediate enhancement compared to the amount the employee invests because employee contributions are increased by tax relief (every £100 invested by a basic rate tax payer will be boosted to £125) and the employer will usually make additional contributions.

Usually, your fund is invested in stocks and shares, along with other assets for diversification, with the aim of growing it over the years before you retire. You can often choose from a range of funds to invest in. Remember though that the value of investments can go up or down. Investments are in line with your risk profile.

There are a number of factors that will affect the size of your pension pot and the income you will receive. If you are in a defined contribution pension scheme (or schemes) and are trying to identify your pension situation.

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