Defined contribution pension schemes explained

A defined contribution pension is a pension scheme that builds up a ‘pot’ of money to pay you a retirement income. They’re sometimes called money purchase pensions.

Defined contribution pensions can be:

• workplace pension schemes set up by your employer

• personal pension schemes set up by you. 

Your money is invested so it should grow over time, but the value of your pension can rise or fall until you take the money.

When you’re able to take your pension, you can choose how and when you want the money. This usually includes the option of taking up to 25% as a tax-free lump sum and using the rest to get a guaranteed or variable income.  

Cash balance plans are a type of defined contribution scheme and work in the same way. But they also include: 

• a guaranteed minimum pension pot value or

• a guaranteed percentage of pay built up for each year of service.

For example, a cash balance plan might guarantee to pay you a lump sum when you retire. This is typically calculated using a percentage of your pay for each year you paid into the scheme – such as 20%.

A collective defined contribution (CDC) pension scheme works differently to standard defined contribution schemes. 

The provider manages everyone’s money together and will provide you with a regular retirement income – sometimes with the option of taking a lump sum.

For more information, see our guide Collective defined contribution pensions explained.

If you’re in a workplace defined contribution scheme, your employer usually takes your pension contributions from your salary. If you’ve set the scheme up for yourself, you make the contributions yourself. 

In both cases, the pension provider will invest your money so it should grow over time. This means the value of your pension can go up and down until you take the money. 

Unless you want to choose your own investments, your provider will usually put your money in a default investment fund. This typically uses ‘riskier’ investments when you’re younger and lower-risk investments as you get closer to retirement age. 

Your pension money could be invested in property, company shares, bonds or a mixture of different types. 

The amount of money in your pension pot when you retire will depend on: 

• how much is paid in, including any employer contributions and tax relief

• how long you save for

• how well your invested money performs

• the pension provider’s charges and fees.

You can check your pension statement to see how much your pension is worth and an estimate of the retirement income it could provide. 

You can usually see your statement by logging in to your provider’s online account or using their mobile app. Your provider will also send you an annual statement once a year.

When you want to retire, you’ll have to choose how to take your defined contribution pot

Paying into a defined contribution scheme is known as contributing. How much you need to pay in depends on the type you have.

If you have a workplace pension, you usually have to pay in at least 5% of your wages. This is typically:

• 4% from you

• 1% from the government in tax relief.

Your employer must also contribute into your pension if you earn at least £6,240 a year. This must be worth at least 3% of your wages. 

Your employer might even pay in more if you do, called contribution matching. 

You can use our Workplace pension contribution calculator to see an estimate of how much you and your employer will pay into your pension.

All these contributions are put into an individual ‘pot’ in your name with the pension provider.

If you set up your own pension, you can usually decide how much and how often to contribute – unless your provider has a minimum amount you must pay in.

For example, you could:

• set up a regular monthly contribution

• make single contributions when you have spare income available.  

Pensions are a great way to save for retirement because they get ‘tax relief’. This means that the Income Tax you’d normally pay to the government goes towards your pension instead. 

Find out more in our guide How tax relief boosts your pension contributions.

How much you save into your defined contribution pension will affect how much it’ll pay you in retirement. 

Our Pension calculator will show you: 

• how much you might need in retirement

• how much your pension might pay you  

• how much extra you could get by changing your contributions. 

The Retirement Living StandardsOpens in a new window also shows you how much you might need to have different lifestyles, including money to live on, entertainment and one holiday a year.

You don't have to stop work to begin taking money from your pension pot, but you must be at least age 55 (57 from April 2028) unless you need to retire early due to poor health. 

When you’re ready to take your pension, you can choose how to use your money. This includes taking up to 25% as tax-free cash and:

• leaving the rest invested until you need it 

• converting the rest into guaranteed income

• setting up a flexible income that you can stop or change at any time

• taking the rest as one or more lump sums.

For all your options, see our guide about taking a defined contribution pension. 

Choosing how to take your pension is an important decision – it could affect your income for decades to come.

If you’re 50 or over, you can also have a free Pension Wise appointment to find out more about your options.

If you’ve had many different jobs, you might have multiple pensions to keep track of.  

If you’ve lost the details of a defined contribution pension, the Pension Tracing Service can help you find contact information.

You can find pension contact detailsOpens in a new window on GOV.UK or see step-by-step help in our guide How to find old or lost pensions.