If you have a workplace pension set up in the last 20 years, or a personal pension, it's almost certainly a defined contribution (DC) scheme. Often called a 'money purchase' or 'pension pot', this is now the most common type of pension in the UK.
Unlike a 'final salary' pension that promises a set income, a DC pension's value is not guaranteed. The amount you get in retirement depends on what you, your employer, and the government (via tax relief) pay in, plus how your investments perform.
This gives you great flexibility, but also puts all the responsibility - from investment choices to making your money last - firmly on your shoulders. Here, we'll cover what a defined contribution pension is, how it works, and how an independent financial adviser can help you manage it effectively.
What is a defined contribution pension?
A defined contribution pension is a personal retirement savings plan where you (and your employer, if it's a workplace scheme) pay in money. These contributions are then invested in funds (like stocks, bonds, and property) with the aim of growing the value of your 'pot' over time.
The final value of your pension pot is not guaranteed. It directly depends on:
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How much you contribute: The money you pay in from your salary.
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How much your employer contributes: The (often 'free') money your employer adds.
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How much tax relief you get: The government tops up your contributions.
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How your investments perform: The growth (or loss) from the funds your pot is invested in over decades.
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The level of charges: The fees deducted by your pension provider.
You are responsible for the investment risk and for deciding how to take the money when you retire.
How does a DC pension work?
Think of it as a personal savings pot with three key benefits:
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Your Contributions: You pay in a percentage of your salary. Under auto-enrolment, the minimum is 5% of your 'qualifying earnings', but you can almost always choose to pay in more.
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Employer Contributions: If it's a workplace pension, your employer must also contribute. The auto-enrolment minimum is 3%, but many employers will pay in more, especially if you do (this is known as 'contribution matching').
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Tax Relief: This is a major bonus. If you're a basic-rate taxpayer, for every £80 you pay into your pension, the government adds £20 in tax relief, making your total contribution £100. Higher-rate taxpayers can claim even more back via their tax return.
All this money is invested in your name. Most workplace pensions put you in a 'default' fund, but you usually have a choice of other funds with different risk levels.
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Accessing your DC pension: The options
From age 55 (rising to 57 from 2028), you have complete flexibility in how you access your pot. This is where the decisions get very important. You can usually take up to 25% of your pot as a tax-free lump sum.
For the remaining 75% (which is taxable), your main options are:
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Flexi-Access Drawdown: Leave your pension pot invested and 'draw down' an income from it as and when you need it. This offers great flexibility but carries the risk that your pot could run out if you withdraw too much or your investments perform badly.
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Buy an Annuity: Use your pot to buy an insurance product called an annuity that provides a guaranteed income for life. This gives you complete security but no flexibility, and you can't normally change it once it's set up.
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Take it all as cash: You can take the whole pot as a lump sum (with 25% tax-free and 75% taxed as income). This will likely result in a very large tax bill and is rarely the best option.
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A mix of options: You can use parts of your pot to do all of the above (e.g., use half for drawdown and half to buy an annuity).
The risks you need to manage
With the flexibility of a DC pension comes risk. The main ones are:
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Investment Risk: Your pot's value can go down as well as up.
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Inflation Risk: The spending power of your savings can be eroded by rising prices.
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Longevity Risk: You could outlive your savings if you withdraw too much, too soon.
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Tax Risk: Taking large sums out can push you into a higher tax bracket, resulting in a large, unexpected tax bill.
How our independent advisers can help
Navigating the risks and options of a DC pension is complex. The decisions you make, especially around retirement, are irreversible. An independent financial adviser can be your expert guide, helping you build your pot and, crucially, turn it into a sustainable income.
Here are the key services our expert advisers can provide:
1. A Full Pension Review
Are your pensions working hard enough? An adviser will review your pensions to analyse all your existing DC pots (from current and previous jobs) and assess:
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Performance: Are your investments performing as they should?
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Charges: Are you paying high fees that are dragging down your growth?
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Risk Level: Is the 'default' fund you were placed in 10 years ago still right for you today?
2. Pension Consolidation Advice
Most people collect multiple pension pots from different jobs. An adviser can help you trace them all and provide a clear recommendation on whether you should (or should not) consolidate them into one, easier-to-manage plan. They will check for any high exit penalties or lost guarantees before advising you to move.
3. Investment Strategy
Instead of just leaving it in the default fund, an adviser will:
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Help you understand your true attitude to investment risk.
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Build a diversified investment portfolio tailored to your goals and timeline.
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Conduct regular reviews to rebalance your investments and keep your plan on track.
4. Planning for Retirement (Accumulation)
An adviser will help you answer the most important question: "Am I saving enough?" They will use cashflow modelling to show you what your retirement could look like and advise on:
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How much you need to contribute to reach your goals.
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How to maximise your tax relief and employer contributions.
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How to use other tax-efficient wrappers, like ISAs, alongside your pension.
5. Planning at Retirement (Decumulation)
This is where advisers add the most value. They will guide you through the complex 'at-retirement' maze by:
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Explaining your options (drawdown, annuity, etc.) in plain English.
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Advising on the most tax-efficient way to take your money.
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Creating a sustainable withdrawal strategy for drawdown to help ensure your money lasts as long as you do.
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Shopping around for the best annuity rates on the market if you need a guaranteed income.
6. Inheritance and Legacy Planning
A DC pension is now one of the most tax-efficient ways to pass on wealth. An adviser can help you structure your finances to make the most of this, as pension pots can typically be passed on tax-free if you die before age 75.
Get started here to book a free pension review and a no-obligation chat with an independent financial adviser who can run through your pension options with you.
FAQs
The pension pot you've built remains yours. It stays invested, but you and your old employer will stop paying into it. You will then be auto-enrolled into your new employer's DC scheme, starting a new pot. This is how people accumulate multiple pensions, and an adviser can help you decide whether to combine them.