A defined contribution pension (aka a DC pension or a money purchase scheme) is a type of private pension that you contribute to on a regular basis. You define how much and when you pay into it. That’s why it’s called a defined contribution pension.
A DC pension can be:
You might also have heard of defined benefit (aka DB or final salary) pensions. They work slightly differently from DC pensions. We explain how and talk you through some of the key defined benefit vs defined contribution pension questions below.
Learn more about the different types of pension, and which might be right for your personal circumstances.
When you pay money into your defined contribution pension plan, it’s invested on your behalf. The amount of control you have over how it’s invested depends on your pension type. With a SIPP you’re in full control, but with most other types of pension you’ll be choosing between a range of investment funds.
When you pay into your DC pension, you’ll get a little help:
You can start taking money out of your DC pension pot once you’re 55 (or 57 from 2028). You can usually take up to 25% of your pot as a tax-free lump sum, subject to the availability of any allowances. If you take any more, you’ll have to pay income tax on it.
Whether or not you take your lump sum, you’ll need to decide what to do with any money still invested in your pot. You can choose one or both of:
All of this is quite a big contrast with DB pensions. They’re only ever set up for you by an employer. You often don’t have to pay into them and you’ll get a guaranteed amount from them, usually based on your final salary and length of service.
You won’t have any choice over how your money is invested and how much you can take out. You probably will be able to choose when it starts paying out, though you’ll usually have to wait until you’re at least 65 or have reached State Pension age.
Yes – in fact, you can have several of each at once.
With each new employer you’ll become a member of a new pension scheme, which could be either a DB or DC one. You might even end up with a hybrid pension that combines the benefits of both types of pension. You’ll probably only be paying into one pension scheme at any given time, though.
You can also save into either or both alongside other kinds of investment. Oh and, once you’ve got several different jobs on your CV you’ll probably also have several different pensions up and running. It can be difficult to keep track of them all. If you’ve lost one, our How to track down your old pensions article can help.
Learn how finding lost pots and bringing them together can help you manage your pension and might save you money on fees.
There’s no single answer to that question because it depends on many different factors, including:
Our How much should I put into my pension article will help you work out how much you might need or want to save into your pension.
When you die, you can leave any money in your DC pension pot to one or more beneficiaries. They won’t have to pay tax on it – and your pension isn’t treated as part of your estate, so it won’t count towards any inheritance tax calculations.
We hope that’s helped you with your quest for defined contribution meaning. If you have any more questions, then:
Check your pension paperwork, or just ask your provider or employer. As a rule, if you set up your pension yourself it can’t be a DB pension, but if an employer set it up for you it might be.
You’ll have to wait until you’re 55, or 57 from April 2028 on. Once you’re the right age, you can take money out as a lump sum (usually with the first 25% tax free, subject to the availability of any allowances), put it into drawdown to pull out as and when you need it or buy an annuity if you want a guaranteed income.
It depends on what you want from your pension. So for example, if you want to control how your pension pot’s invested a DC pension will probably be a better bet than a DB one. But if you want a guaranteed income without having to buy an annuity, a DB one will be preferable. It also depends on how much you have invested in it – a high-value pension of one kind will usually be better than a low-value pension of the other. And of course, you can choose to set up a DC pension for yourself but you can only ever join a DB pension through an employer.
Yes, you can have both of each kind of plan at once. And you can have more than one of each kind at the same time too.
In a defined contribution plan, the saver bears the risk. If an employer’s also paying into the plan, their responsibility ends once they’ve made their own contributions to it.
Yes, you can cash in a defined contribution plan. Once you reach the age of 55 (or 57 after April 2028) you can start taking money out of it, either as a lump sum, through drawdown or by buying an annuity.
Yes, a SIPP is a defined contribution pension scheme.
