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Defined contribution pension schemes

These are the most common types of workplace pension.

With defined contribution pension schemes, your pension pot is put into various types of investment, such as shares (shares are a stake in a company). It is expected to grow over time.

Your pension pot is invested in this way because in the long run it usually gives a better return than a savings account. Over the years, the value of investments can go up and down. But if the value goes down in the short term, it is likely to recover in the long term.

With some defined contribution pension schemes, you may be able to make decisions about how your money is invested. But you don’t have to – all pension providers have to offer a fund that meets the needs of most people and this is where your money will be automatically invested. Whoever runs your pension scheme will have more information on this.

Whoever invests your pension pot, for example your pension provider, may charge you. Often this is a percentage of the value of the pension pot. You may see this on your pension statements or on other pension scheme information.

You may hear the term ‘money purchase’ pension scheme. This is another way of referring to a defined contribution pension scheme.

The amount you get when you retire

The amount you get at retirement is based on how much is paid in and how well the investments have performed. The earlier you start and the more you, your employer and the government put in, the more money you are likely to have at the end.

Normally when you retire you take some of your pension pot as a tax–free cash lump sum. You use the rest to buy yourself an income, on which you pay tax.

• Safety of workplace pension schemes

Defined benefit pension schemes

For defined benefit schemes, the amount you get at retirement is based on various factors. These could include how long you have been a member of the pension and your earnings. Examples include ‘final salary’ or ‘career average’ earnings related pension schemes.

Normally when you retire you take some of your pension as a tax–free cash lump sum. The rest you get as regular income, on which you pay tax.

How this income is worked out varies from scheme to scheme – whoever runs your pension scheme will have information on this.

More useful links

• Saving for retirement

• Understanding personal pensions

• Workplace pensions - making additional voluntary contributions to increase your pension