Defined Contribution Pension
Defined contribution pension scheme definition
A Defined Contribution (DC) pension is a type of pension plan where the value of your pension pot is based on your contributions. This type of pension can be a personal or stakeholder pension, often referred to as a 'money purchase' pension scheme. These schemes can be provided by your employer as a workplace pension or set up privately by you as a personal pension.
Money is invested in various areas such as shares, bonds, and commodities by the pension provider using money contributed by you or your employer. The value of your pension pot can go up or down depending on how the investment funds perform. Contributions to DC schemes may be eligible for tax relief.
Some DC schemes transition your pension pot into lower-risk investments as you get close to retirement age, it is called Lifestyling. You may be able to ask for this if it does not happen automatically.
The value of your pension pot will be determined by the level of contributions made, the performance of the investments, and the fees taken from your pension.
When you decide to retire or start withdrawing from your pension fund, you have the flexibility to take out the entire amount at once or in smaller, periodic payments.. Any money you withdraw will be subject to income tax. You can withdraw up to 25% of your pension pot tax-free, while the remaining 75% will be taxed as part of your overall income.
If you're considering transferring your Defined Contribution Pension
These are usually either personal or stakeholder pensions. They’re sometimes called ‘money purchase pension schemes. They can be workplace pensions arranged by your employer or private pensions arranged by you.
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Advantages of Defined Contribution Pension Plans
A great advantage of defined contribution pension plans is the ability to transfer the pension scheme from one provider to another.
The reasons for the transfer will vary from one person to another, however, the most common reasons are:
You Want To Consolidate Your Pension Plans
Improving your benefits options
If you set up your pension a long time ago, you might be missing out on benefits that some of the new defined contribution pension plans offer. Changing to another provider could give you access to benefits such as online access to your pension plan, or more retirement income options such as drawdown.
Get Access To Better Investment Options
You may want to transfer your Defined Contribution Pension plan to a different provider that can offer a better range of investment options. Your current provider may only offer a limited number of investment funds, or they could be limited to a specific geographical region which could affect your return.
Charges and fees
One of the reasons that you may want to transfer your Defined Contribution Pension is that you are looking for a pension plan that offers a lower set of charges and fees. Some providers, especially for the old pension contract, have hidden charges that policyholders are not aware of. One of the ways to lower the charges is consolidating your pension policies into one, but you need to check with your financial adviser if that is suitable to your individual situation.
You Might Be Unhappy With Your Current Pension Provider
If you are not happy with the level of service that you currently receive from your pension provider, you could think of moving your pension plan away to a provider with a better quality of service and administration.
The above are some of the reasons that could encourage you to transfer your DC pension scheme, but it is usually a lot more complicated because everyone’s case is different.
The Pension Hub Service
The free service from The Pension Hub connects you with FCA Regulated Pension Advisor and you qualify for a FREE pension advice consultation.
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