Defined Contribution or ‘Money Purchase’ pensions are the most common type of pension fund. They usually come in the form of a personal pension or stakeholder pension that are either arranged by you directly or through your employer within your workplace pension.
Types of Defined Contribution (DC) Pensions:
- Executive Pension Plan
- Group Personal Pension
- Master Trust Pension (e.g. The People’s Pension, NEST Pension and NOW Pension are now popular with auto-enrolment schemes)
- Self-Invested Personal Pension (Commonly known as SIPP)
- Stakeholder Pension
How do Defined Contributions Pensions grow?
A Defined Contribution pension is a long-term savings account, and its growth is directly linked to the amount of funds (contributions) saved, the investment performance of the fund and the fees taken from the pension provider. The value of your pension pot can go up and down depending on these investments and fees taken, so it is worth keeping a close eye on how your DC pension fund is performing.
There is no limit to the number of pensions a person can hold, and many people have multiple defined contribution pensions that they have either started directly or through old workplace schemes. When you come to retire, the size of your pension fund and retirement income you could receive will depend on many factors including:
- How long have you saved into your pensions
- How much you and your employer have paid in (called contributions)
- How much money you may have taken out previously in a lump sum
- How well your pension schemes investments have performed
- What charges have been taken out by your pension provider for administration
When can you access your Defined Contributions Pensions?
With most modern defined contribution pensions, you can access your funds from age 55, but you will need to check your pension policy details to confirm.
There are numerous ways in which you can use your DC pension savings, but not all pensions offer the same access:
- Purchase an annuity insurance policy (taxable retirement income) that will deliver a set amount of funds regularly
- Take 25% Tax-Free Lump Sum and leave the rest invested until required
- Take 25% Tax-Free Lump Sum and purchase an annuity insurance policy with the rest of the funds
- Take all of your funds in one go, although you may be penalised with higher taxes within that financial year
- Take lump sums as, and when you need them, the first 25% of your withdrawals will be tax-free
What’s best for you and your pension?
It is always advisable to get professional financial help when investing in your future and understanding what the best option for you is when you retire.
At Pension Works, we offer a full, independent retirement planning service, to help you get the most from your pension savings. We will assess your current defined contribution pensions for free and advise on how to invest your savings to reach your retirement goals.
To start your free defined contribution pension assessment, please fill in the form or call 0808 164 2664 today.