Understanding Defined Contribution Pensions

Jeremy Cole

Financial literacy

UNDERSTANDING DEFINED CONTRIBUTION PENSIONS

UNDERSTANDING DEFINED CONTRIBUTION PENSIONS A defined contribution pension is a pension with a final value that is determined primarily by the total amount of contributions made by the individual throughout their working life.

Other factors that can affect the value of a defined contribution pension include retirement choices and the performance of the investments of the pension fund.

Pension Investments Employees may have contributions for a defined contribution pension deducted from their salary before tax. Self-employed individuals can also choose to establish a defined contribution pension and make payments into it.

Pension providers invest the money in the pension fund, which can result in the value increasing or decreasing depending on the performance of those investments. Typically, the closer an individual gets to retirement age, the lower the risk of the investments chosen.

Employer Pension Schemes Defined contribution pensions established in the workplace may also benefit from contributions from the employer as well as the employee.

This can increase the overall value of the pension come retirement.

Most schemes allow employees to opt to increase their personal contributions if they wish for more income after retirement.

JEREMY COLE You can learn more about financial literacy and how to save for retirement by visiting the blog of Jeremy Cole, Red Rose co-founder.