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What type of pension do you have? > Defined Contribution Pension

2. Defined Contribution Pension

A Defined Contribution Pension is based on the value of your underlying pension fund(s).

You pay in throughout your lifetime (either yourself, your employer, or a third party), and with selection of funds comprising appropriate asset allocation you should attain compounded growth that enables you to retire with a healthy sized pot to pay for your retirement years.

Like other pensions, Defined Contribution Pensions get;

  1. Tax Relief on entry
  2. Tax Relief on the growth
  3. Taxed (Income Tax) on the way out, so this could be 20%, 40%, or 45% depending on what the individual’s income is that year.

The underlying fund(s) will have investment parameters explained in its factsheet. The fund manager will then be in charge of managing the investment within those limits and will often change the asset/asset allocation content of the fund if he believes it will enhance performance (enhancing performance might also mean reducing risk) (see my section on How to select your pension and How to select your pension funds) through choices made by the fund manager(s).

(See section on Taking pension income for details of how to take income from DC pensions).

Of your total funds, you can take 25% tax free cash (also known as Pension Commencement Lump Sum PCLS) (this can be more or less depending on specific scheme rules and transitional protection).

It is often a good plan to use the tax free cash first contact Cambridge Pensions for advice regarding this.

Things that determine how much you get from your Defined Contribution pension will be;

  1. Choices you make when you retire
  2. Annuity rates when you retire (if you chose to take an annuity, this is not necessarily the best option)
  3. What charges your pension provider took out of your pension
  4. How much PCLS you take
  5. How well your investments performed
  6. How much your employer pays in
  7. How long you saved for
  8. How much you paid in

Lots of providers will offer you an annuity on retirement, you DO NOT have to accept this.

A Financial Adviser can help with all of these decisions/choices contact Cambridge Pensions