What is a defined contribution pension?
Unlike defined benefit pension schemes, a defined contribution pension retirement income depends on the amount you commit over the course of your membership. It can also be influenced by factors such as your choices in later life, and how the scheme's investments are operating on the market.
Defined benefit vs. defined contribution schemes
There are several characteristics associated with the provision of your workplace pension. For years, the financial world has debated the risks and strengths of defined benefit vs. defined contribution schemes. The main difference is that with a defined benefit scheme, your employer will automatically pay in to the plan, usually after five years of service, before subscribing to regular contributions throughout your working career. You are then guaranteed a set payout upon retirement. With a defined contribution pension scheme, you also contribute to the pot as an employee, which may afford you a more generous income in the future.
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, should 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 to safeguard your assets when it means the most.
Withdrawing defined contribution pensions
You can withdraw your funds once you reach the age of 55. You may however, be entitled to leave the defined contribution pension scheme earlier, depending on the year you began with the scheme, due to an underlying health condition, or if your life expectancy is dramatically shortened.
It can be useful to estimate the income you are entitled to receive from your defined contribution pension scheme, so that you can plan for your retirement and address any shortfall in the meantime. How much you can withdraw will depend on how much you have paid in, and the length of time you’ve held the pension. If it’s a workplace pension, it’ll depend on how much your company has paid in too. Ask for a forecast on your provider’s statement.
Lump sum payments
If you wish to retire with an accompanying lump sum payment, you can access a quarter of your funds tax-free. The remainder can be used as regular taxable income, or withdrawn as a larger, or multiple smaller lump sums. When withdrawing a defined contribution pension, make sure you’re aware of any affiliated administration fees from your provider.
Defined contribution pension advice from Blacktower
We understand that peace of mind when it comes to 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.