Defined contribution pensions

What is a defined contribution pension?

A defined contribution (DC) scheme is simply a pension ‘pot’ or fund that you build up over many years. At retirement, there is no guaranteed income – the amount of pension you receive depends on factors such as the amount paid in, the fund’s investment performance, and the choices you make at retirement.

Defined benefit vs. defined contribution schemes

One of the main differences between a defined benefit (DB) scheme is that a DB scheme guarantees a set pension on retirement based on salary and years of service. There is no guaranteed pension available with a DC scheme. DB schemes are often referred to as ‘gold-plated’ because of the guaranteed pension at retirement.

On death (either before or during retirement) a DB scheme usually pays a dependant’s pension payable to your spouse or partner – typically 50% of your pension at the date of death.

How to set up a defined contribution pension scheme

Most companies these days are likely to choose a defined contribution pension plan, and as it is a legal requirement to offer a workplace pension scheme, they will automatically enrol employees if they fit the eligibility criteria. Human resources should provide employees with information on their defined contribution provider within two months of starting with the company. The employer can forecast pension spend as their outgoings are defined from the outset, and many will choose from the top defined contribution providers – large specialists who cost less – while taking advice from the UK Pensions Regulator.

If you are setting up your own private defined contribution pension scheme, it is essential that you seek advice from a wealth management group such as Blacktower to ensure you are investing with the top defined contribution providers. We can help safeguard your assets when it matters most.

Taking defined contribution pension benefits

You can take benefits once you reach the age of 55, but note that this age rises to 57 in 2028. You may, however, be able to draw your pension earlier, if you have a ‘protected pension age’, or if your life expectancy is dramatically shortened.

Income

Estimating the income you are entitled to receive from your defined contribution pension scheme can be useful for planning your retirement and addressing any shortfall in the meantime.

You can set up your pension either by buying an annuity which means that you exchange your pension pot for a guaranteed income provided by an insurance company. The income you receive will depend upon the value of your pot and annuity rates that prevail at the time.

An alternative is to opt for Flexi-Access Drawdown which allows you to draw any amount from your pension pot as and when you need it. Whilst this is an flexible option, there is always the danger that you will run out of money if you withdraw too much each year.

Lump sum payments

If you wish to retire with an accompanying lump sum payment, you can take 25% of your fund as tax-free cash. The remainder can be used to provide an income – either by purchasing an annuity or by Flexi Access Drawdown. Any income you take will be taxable at your marginal (highest) rate.

Defined contribution pension advice from Blacktower

We understand that peace of mind regarding your money is imperative now more than ever. That’s why Blacktower only deals with the top defined contribution providers, to make sure you can look forward to the retirement you deserve. Finding the right scheme can be a lengthy process, but after your initial no-obligation appointment with one of our reliable advisors you’ll be on a smooth path to a secure future. Alternatively, we can advise you on other international pension plans, including defined benefit schemes, QNUPS, SIPPs, and QROPS.

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