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Your DC Pension Scheme

How does a DC pension scheme work?

The concept of a DC pension is straightforward.  Contributions are paid into the scheme and invested in an account individually allocated to you.  When you retire, the proceeds from your individual account are used to provide your retirement benefits.

What contributions are paid into the scheme?

Both you and your employer can pay contributions to the scheme. You should have been given a Scheme Booklet or other documents outlining the contributions for your scheme – if you do not have this document, ask your employer for a copy.  The contributions you pay to your company scheme (up to certain limits) come out of your pay before income tax – so you do not pay tax on this money.

In addition to any compulsory contributions (as detailed in your scheme's rules), you can also pay Additional Voluntary Contributions to increase your retirement benefits.

How is my individual account invested?

Most DC schemes give members some choice over how their contributions, and those paid by their employer, are invested. Your Scheme Booklet should give you details of the investment choices available to you.

Having a choice of investments can give you greater control over your future financial security.  Your choice of investments is important because your final pension will depend amongst other factors on how well the investments held in your account perform prior to your retirement.  You'll need to keep your investment choices under review as you progress through your working life, as changes in your financial or personal circumstances may affect your decision and attitude to risk.

Click here for more information about investing for retirement

What retirement benefits will I get?

Details of the benefits you will get when you retire will be given in your Scheme Booklet.  Normally these benefits are:

  • A pension, usually in the form of an "annuity" bought from an insurance company.  Your pension will be subject to normal rates of income tax.  There are different types of annuity to suit different personal circumstances, and your scheme will tell you what options you have shortly before you retire.

  • A cash lump sum.  Under current legislation this is tax free.  The maximum amount you can take as a lump sum is set by the Inland Revenue, and your scheme will tell you how much this is shortly before you retire. Any cash lump sum you take would come out of your pension account and so reduce the amount available with which to buy an annuity. The value of tax savings will depend on individual circumstances. Taxation legislation is liable to change in the future.