What is a defined contribution (DC) pension scheme?

Workplace pensions are an important part of your pay package as they are deferred pay. However they are also the part that is often the least understood.

Studies have shown that a lack of understanding contributes to poor decision-making when it comes to pensions, so here are some pension basics.

  • Defined contribution (DC) – where your monthly pension contributions buy units in a fund, which fluctuates daily, so the final amount is not guaranteed. The accumulation of these units is commonly referred to as your ‘pension pot’. At retirement age, members traditionally exchange this for an income for life by buying an annuity. These are also known as Money Purchase Pensions.

For more detailed explanations of pension types, visit the Pensions Advisory Service website.

Risk

While the risk of investment performance and life expectancy falls on employers in defined benefit schemes, it falls on individuals in defined contribution schemes. The level of the employer and employee contributions to this type of pension is extremely important.

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