Defined contribution pension scheme
Also known as a money purchase scheme. They are another type of pension scheme that relies on contributions from the employer, employee and a tax boost from tax relief, hence the name defined contribution pension.
Defined contribution pension schemes often provide a more generous employer contribution than Auto-enrolment schemes, and also allow various different employee contribution amounts to be made and changed along the way.
Employers who operate defined contribution schemes that already offer the same or better benefits than Auto-enrolment pensions, do not have to operate the Auto-enrolment schemes as well, although they do still have to make sure the pension is offered to all eligible employees.
Defined contribution pension purpose
The purpose of all defined benefit and money purchase pension schemes is the same, in that you are simply trying to build up the largest “pot” of money you possibly can, over your working lifetime.
The amount of income you can generate in retirement, either by an annuity, or drawdown, or any other means of taking a pension, is entirely dependent on how much you have in your “pot” when you decide to retire.
We will cover some of the main rules and regulations about pensions in another pat of the website. On the SIPP page we cover the minimum age for taking a pension, maximum pot sizes, and tax-free limits.
Defined contribution pension scheme tip
TIP: If your employer offers a defined contribution scheme in which they match your contributions up to a certain level, for example, 7.5% or 10%, then if possible, go for the highest amount you can, as you will be getting extra free money from both your employer and the Government.