3. What is a defined contribution pension?
A defined contribution pension is like having your own ‘pot of money’ which is managed by a pension provider, such as an assurance company. You accumulate money into the pot over time and invest it in a range of investment funds of your choice.
When you choose to retire (the minimum age is now 55), you can draw at least a quarter of your pot tax-free and the balance may be used to create your pension in retirement which is subject to income tax.
Your pension fund will need to last as long as you do and sometimes decisions are irreversible. So, may sure you decide carefully how you plan to use it. We can help you make this big decision.
In a defined contribution scheme, money invested in these funds normally go up and down over time depending on the types of assets your money invests in, how these funds are managed and the amount of charges the fund manager takes over time. If you have a stakeholder pension or similar company pension, all charges are normally limited to 1% of your pension fund per year. Charges will vary however, depending on the types of funds you choose to invest in.
Fund managers normally invest your money in a range of assets including shares, property, loans to companies and the government and cash for banks to use.
Some investment funds hold riskier assets and so you are more at risk of losing money, but equally you may find these assets perform well in the long run. Investing in lower risk assets means you are less likely to lose money, but they’re unlikely to provide as good return in the long term compared to more riskier assets.
Choosing the right investment fund or mixture of funds is very important and you should always seek financial advice!
To find out the value of your funds, all you need to do is contact your pension provider. Sometimes the provider will give you the opportunity to register to look at the value of your pension through an online ‘customer portal’. Alternatively, they can send you information in the post. Don’t forget to ask for a projection as well as a valuation of your pension. The projection will give you an idea of what you’ll receive when you retire.
We can help you gain an accurate picture of what all your pensions are worth and how you can make the most of them.
Things to think about…
- Pension projections include lots and lots of assumptions. But it is helpful as a guide.
- Don’t forget to factor in inflation – your pension fund will fall in value simply because the cost of living increases.
- Your pension pot is purely what you’ve saved up. This will need to be converted to a guaranteed income (by buying an annuity) or drawn flexibly.
- Remember, your pension fund will need to last as long as you do! So may sure you decide carefully how you plan to use it.
- Don’t forget that you may have to pay tax on any income you receive.
- The amount of pension you receive will also depend on how you draw your pension.
- Find out different ways of drawing your pension.
With all of these points, we can help.