What is a Defined Contribution Pension?

14 Mar 2024

A Defined Contribution (DC) pension, also known as a 'money purchase' pension, has become the most prevalent type of pension. It can either be arranged by you directly with a provider as a personal pension or through an employer-based workplace pension. Types of DC pensions include Executive Pension Plans, Group Personal Pensions, Master Trust Pensions like NEST, Self Invested Personal Pensions (SIPP), and more. Simply put, DC pensions are where you build up a pot over your career to fund your retirement.

How do Defined Contribution Pensions work?

In a DC pension, both you and your employer (if it's an employer arrangement) contribute to your pension pot. These contributions are then invested in various assets in the stock market within a tax-advantageous wrapper, aiming to grow over decades. The government also tops up your contributions through tax relief, adding significant value to your pension pot.

From age 55 (set to rise to 57 by 2028), you can start accessing your pension in several ways such as drawdown, purchasing an annuity, or taking up to 25% as a tax-free lump sum.

Benefits of a Defined Contribution Pension

  • Flexibility: DC pensions provide flexibility in how you can access your funds in retirement.

  • Tax Benefits: Contributions attract tax relief, effectively increasing the value of your deposits.

  • Inheritance: In contrast to Defined Benefit pensions, a DC pension can be inherited by your beneficiaries tax-free, providing significant advantages for estate planning.

Things to consider

While offering flexibility and potential growth, the value of a DC pension can fluctuate due to stock market performance. It's also a finite resource, meaning careful management is crucial to prevent running out of funds in retirement.

When can You Access Your Pension?

Legally, you can access your DC pension from age 55, although this is set to increase to 57 from 2028. There are specific cases where access may be allowed earlier, such as health issues or having a protected pension age.

What Happens if You Die Before Using Your Pension?

If you pass away before age 75, any remaining funds in your pension can be passed on tax-free. Your beneficiaries can choose how they wish to receive this, including as a lump sum or through drawdown.

Looking ahead

Understanding your pension, how much to contribute, and when and how you can access it, are vital steps in securing a comfortable retirement. While caring for the immediate, remember your pension can be a powerful tool for securing your family's financial future. If you're juggling multiple pension pots or feeling uncertain, consider speaking to a financial advisor or explore options with a service like Penny to consolidate and manage your pensions effectively.

SOME IMPORTANT THINGS YOU SHOULD KNOW
Pensions are long terms investments. It’s important that you know the value of your investment could go up as well as down. You could get back less than you put in. Past performance is not necessarily a guide to the future and pension investing is not intended to be a short-term option. Penny does not provide financial advice so please be sure that this investment is right for you.

Your current pension might have special benefits that will be lost if you transfer to Penny. These special benefits include: Guaranteed Annuity Rate (GAR), Guaranteed Bonus Rate (GBR), Guaranteed Minimum Pension (GMP) and Protected Tax Free Cash (PFTC) over 25%. If this is the case, we will not transfer your pension, as you may be better off not transferring in these cases.

Your current provider might charge you a transfer-fee to transfer your pension to Penny. If this is the case, we will not transfer your pension, as you may be better off not transferring in these cases.

You should consider the charges and benefits before transferring your old pensions to your new plan, and consider whether the risk and reward profile of the investments offered matches your needs. It may be that your current provider has lower fees than Penny - where this is the case, we recommend that you carefully consider whether to transfer your pension to Penny, as you may be better off not transferring in these cases.

If you are in any doubt about proceeding you should contact a financial adviser.
© Copyright 2024 Penny Technology Limited. Company registration: 11999643. FCA Reference Number: 931299.
SOME IMPORTANT THINGS YOU SHOULD KNOW
Pensions are long terms investments. It’s important that you know the value of your investment could go up as well as down. You could get back less than you put in. Past performance is not necessarily a guide to the future and pension investing is not intended to be a short-term option. Penny does not provide financial advice so please be sure that this investment is right for you.

Your current pension might have special benefits that will be lost if you transfer to Penny. These special benefits include: Guaranteed Annuity Rate (GAR), Guaranteed Bonus Rate (GBR), Guaranteed Minimum Pension (GMP) and Protected Tax Free Cash (PFTC) over 25%. If this is the case, we will not transfer your pension, as you may be better off not transferring in these cases.

Your current provider might charge you a transfer-fee to transfer your pension to Penny. If this is the case, we will not transfer your pension, as you may be better off not transferring in these cases.

You should consider the charges and benefits before transferring your old pensions to your new plan, and consider whether the risk and reward profile of the investments offered matches your needs. It may be that your current provider has lower fees than Penny - where this is the case, we recommend that you carefully consider whether to transfer your pension to Penny, as you may be better off not transferring in these cases.

If you are in any doubt about proceeding you should contact a financial adviser.
© Copyright 2024 Penny Technology Limited. Company registration: 11999643. FCA Reference Number: 931299.
SOME IMPORTANT THINGS YOU SHOULD KNOW
Pensions are long terms investments. It’s important that you know the value of your investment could go up as well as down. You could get back less than you put in. Past performance is not necessarily a guide to the future and pension investing is not intended to be a short-term option. Penny does not provide financial advice so please be sure that this investment is right for you.

Your current pension might have special benefits that will be lost if you transfer to Penny. These special benefits include: Guaranteed Annuity Rate (GAR), Guaranteed Bonus Rate (GBR), Guaranteed Minimum Pension (GMP) and Protected Tax Free Cash (PFTC) over 25%. If this is the case, we will not transfer your pension, as you may be better off not transferring in these cases.

Your current provider might charge you a transfer-fee to transfer your pension to Penny. If this is the case, we will not transfer your pension, as you may be better off not transferring in these cases.

You should consider the charges and benefits before transferring your old pensions to your new plan, and consider whether the risk and reward profile of the investments offered matches your needs. It may be that your current provider has lower fees than Penny - where this is the case, we recommend that you carefully consider whether to transfer your pension to Penny, as you may be better off not transferring in these cases.

If you are in any doubt about proceeding you should contact a financial adviser.
© Copyright 2024 Penny Technology Limited. Company registration: 11999643. FCA Reference Number: 931299.