Defined Contribution Pension
A pension scheme where your retirement income depends on how much you and your employer contribute, and how your investments perform.
A defined contribution (DC) pension is a scheme where you build up a personal pension pot through contributions from you, your employer, and tax relief from the government. The money is invested, and the value of your pot at retirement depends on how much was contributed and how those investments performed over time. Unlike a defined benefit pension, there is no guaranteed income — you bear the investment risk.
Most workplace pensions set up under auto-enrolment are defined contribution schemes. The minimum total contribution is currently 8% of qualifying earnings, with at least 3% coming from your employer. Many employers offer to match higher contributions, which can significantly boost your pot. Your money is typically invested in a default fund chosen by the scheme, but you can usually change your investments if you prefer a different approach.
When you reach retirement age (currently 55, rising to 57 from April 2028), you have several options for accessing your DC pot. You can take up to 25% as a tax-free lump sum, move into drawdown for flexible income, buy an annuity for guaranteed income, or take your whole pot as cash (though this may result in a large tax bill). The flexibility of DC pensions is a significant advantage, but it also means you need to plan carefully to make sure your money lasts through retirement.