Defined Contribution Pension Schemes in the UK

Defined Contribution Pension Schemes | December 2023

Defined contribution pension schemes, typically known as DC schemes, are the most common type of pension scheme where the amount you have for retirement is based on how much you have contributed, and how well the plan’s investments have performed.

DC schemes are prevalent in the UK, and are often provided by employers as workplace pensions.

Table of Contents

1. Understanding Defined Contribution Pension Schemes

Defined contribution pension schemes are based on contributions paid into a pension pot by the employee, the employer, or both.

The pension provider then invests these funds on the member’s behalf, successful investments significantly increasing the amount in the pension pot.

The pension pot is intended to provide a source of income after you retire. It differs from a defined benefit scheme, where the retirement income is based on the member’s salary and length of service in that employment. 

In a defined contribution scheme, the investment risk is borne by the member, rather than the employer.

A financial adviser can guide you on how a defined contribution pension scheme can best meet your retirement goals. This can be useful to receive advice on contribution levels, investment options, and retirement age, among other things. They can also provide a pension calculator, a helpful tool in understanding the different variables affecting the amount in your pension pot.

The normal retirement age (NMPA) is currently 55. However, from 6 April 2028, the NMPA will rise to 57. However, when you can start drawing benefits from your defined contribution pension plan may depend on the terms of your specific plan, your personal circumstances, and details outlined by your employer.

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2. Features of Defined Contribution Pension Schemes

In a DC pension plan, the pension income received at retirement depends mainly on the contributions paid into the scheme, the investment returns made with that money, and the choices made when you access the pension benefits. 

Although these features make defined contribution plans flexible, it also involves some risk. They are dependent on the success of investments and balancing current income with savings.

A key feature of defined contribution schemes is the ability to choose where the contributions are invested. The pension provider usually offers a range of investment options,including lower risk investments, such as bonds and cash, to higher risk investments like stocks and shares.

It is important to note that the type of investment will vary based on your personal preference on risk, lower risk options proving more beneficial if you are working in a shorter time frame.

Members typically make their own contributions to their pension, as a percentage of their salary. Whilst an employer’s contributions can match the employee’s contributions up to a certain percentage, others contribute a fixed percentage regardless of the employee’s contributions.

If you are just in a minimum compliant auto-enrolment pension scheme then the employer’s contribution is likely to be less than yours.  

The contributions are usually directly deducted from the member’s salary by the employer and sent to their pension provider. This process will happen automatically, making it simple for members to save for retirement.

3. Setting Up a Defined Contribution Pension Scheme

The vast majority of defined contribution pension schemes involve the following steps. 

Step 1

Firstly, the employer sets up the scheme and chooses a pension provider. The provider will then manage the scheme, administer the contributions and provide access to investment options.

Step 2

Next, the employer and the pension provider agree on the scheme terms, such as deciding on the contribution levels and matching arrangements. Remember that an employer matching of contributions is common but not guaranteed. This is because policies vary between pension schemes.

Step 3

Once the scheme has been set up, any employees can join. They decide how much they want to contribute from their monthly salary, with the pension provider then investing this amount. Employees can often choose how their money is invested, based on their risk appetite, retirement goals and personal preferences.

Step 4

After this, the employee will receive regular updates about the performance of their investments and the size of their pot. They can adjust their contributions or investment choices over time, when necessary. 

Sourcing advice from a financial adviser can also help you to make these decisions wisely and avoid mistakes.

4. Employee Contributions to Defined Contribution Schemes

Employee contributions to defined contribution schemes are a vital part of building up a good pension amount, typically a percentage of the employee’s salary.

This is deducted directly from the employee’s pay and paid directly into the pension pot, the employer potentially matching this contribution.

The more an employee contributes, the larger their pension pot. However, an employee’s contribution depends on various factors such as your income, age, retirement goals and personal circumstances.

Finally, the pension provider invests these contributions, with the returns contributing to the growth of the pension pot. However, due to the volatile nature of the stock market, the returns are not guaranteed. Therefore, the pension pot’s value can go down and up.

"In the UK, employers are required to contribute to their employees' workplace pension schemes, known as 'employer contributions'."

5. Employer Contributions and Matching in UK

In the UK, employers are required to contribute to their employees’ workplace pension schemes, known as ‘employer contributions‘. The minimum level an employer contributes is set by law, with many employers offering more than this minimum.

Many workplaces also offer ‘matching contributions’, meaning that the employer decides to match the employee’s contribution to a certain level. For example, if the employee contributes 5% of their salary, the employer may also contribute 5%.

Matching contributions can significantly boost the size of your pension, therefore doubling the contributions. If an employee contributes 5% of their salary and their employer matches this, the pension pot effectively receives 10% of the employee’s salary.

However, matching contributions are not offered everywhere, and may only be matched to a certain amount. This makes it necessary to understand the terms of your specific pension scheme in your workplace, helping you to plan for your retirement more effectively.

defined contribution pension

6. Investment Options in Defined Contribution Schemes

Defined contribution schemes typically offer a range of options for you to invest in. These options can include a mix of different assets, such as shares, bonds, property and cash.

These investments aim to grow the pension pot over time, depending on whether the returns are successful. However, beneficial growth is not guaranteed. The value of the pension pot can go down as well as up, leaving your money invested. This means that it is dependent on its performance in the financial and stock markets. For instance, income drawdown sees you leaving your money invested in the stock market and allows you to draw income from it.

When choosing your type of investment, it is crucial to consider your appetite and preference for risk. 

Higher risk investments, such as shares, can potentially generate higher returns and losses. 

Whilst lower risk investments, such as bonds and cash, offer more stability, may possibly offer lower returns. 

The investment strategy is usually decided by the pension provider, based on the risk level chosen by the member. Consequently, it’s important to review the performance of the investments regularly and make adjustments if needed.

Most pension providers will offer a default investment option. As you get closer to retirement, this changes the asset allocation from higher risk to lower risk investments. For members who don’t select their own investments, this helps to manage volatility risk.

Getting advice from a financial advisor when choosing your investment may prove helpful. They can offer guidance based on your retirement goals and risk appetite from a learned point of view.

money purchase scheme

7. Risks and Returns of Defined Contribution Schemes

As well as the risk of investment performance, DCSs also include the risk of inflation. 

If the returns on the investments do not keep up with inflation, the purchasing power of the pension pot could decrease over a period of time. For example, you might be able to buy less with your pension pot in the future than you can today.

There is also the risk of outliving your pension pot. For instance, if you withdraw too much too soon, you could run out of money in later life. It is, therefore, important to plan carefully when deciding how much to withdraw. This ensures financial security for your whole retirement.

Despite these risks, defined contribution schemes also offer the potential for high returns. If the investments perform well, the pension pot could grow significantly. 

This could provide a comfortable income in retirement. The retirement benefits for each member depend on how much money has been built up by the member’s retirement date. Therefore, it’s not possible to know in advance what pension benefits a member will receive.

8. Tax Benefits of Defined Contribution Pension Schemes

Employee contributions to defined contribution pensions qualify for tax relief, working to reduce your taxable income. When you start taking money out of your pension pot, you can usually take 25% as a tax-free lump sum. Alternatively, the rest is taxed as income.

In addition, the growth of your pension pot is largely tax-free. This means that the returns on your investments are not subject to income tax or capital gains tax.

These tax benefits can make defined contribution schemes a tax-efficient way to save for retirement, making it an attractive scheme for many. However, as the rules can be complex, getting professional guidance from a financial advisor may be helpful.

9. Withdrawing Funds from Defined Contribution Schemes

From age 55, you can start withdrawing money from your defined contribution pension scheme. The way you do this may depend on your personal circumstances and retirement goals, making it important to know the implications of your choices before making a decision.

One option is to withdraw a singular tax-free amount. You can typically take up to 25% of your pension pot tax-free, with the rest being taxed as income.

Another option is income drawdown. This involves keeping your pension pot invested and taking out money as and when you need, potentially providing a regular income after you retire.

Alternatively, you could use your pension pot to buy a product that gives you a guaranteed income for life, otherwise known as an annuity.

10. Transferring Your Defined Contribution Pension

You may also be able to transfer your defined contribution to a new pension scheme. This could be to consolidate your pension pots, to access different investment options, or to take advantage of a better system that’s more suited to you.

However, transferring a pension is only the best option occasionally, potentially involving fees and resulting in a lower retirement income. 

If you decide to transfer, the vast majority of processes involve contacting your current pension provider and the provider of the new scheme. They will provide the necessary paperwork, helping to guide you through the transfer.

defined contribution plan

11. The Importance of Personal Contributions in Pension Schemes

Personal contributions is the money paid into your pension scheme from your salary and are crucial to building up your pension pot. The more you contribute, the larger your pension pot will be at your retirement date.

The amount you contribute can often be flexible. 

For instance, you might increase your contributions as your salary increases or as you get closer to retirement. Remember, your employer may also match your contributions up to a certain level, making your pension savings grow exponentially .

However, it’s important to consider how much income you’ll need in retirement and whether your current contributions will be enough to provide that. You might need to adjust your contributions regularly or consider other retirement savings options, balancing your current and future financial situations.

12. Retirement Benefits from Defined Contribution Pension Schemes

The retirement benefits you can receive from a DC scheme depend on several factors. These include the amount of contributions paid, the performance of your investments, and the age at which you start drawing benefits. 

You can currently access your pension pot from age 55 in most schemes, but it is important to note that this is rising to age 57 from 2028.

One of the benefits is the ability to take a tax-free larger sum from your pension pot, usually up to 25% of it.The rest of your pot can be used to provide a regular income throughout retirement, buy an annuity, or withdraw amounts as and when you need them.

The method in which you take your benefits affects the longevity of your pension pot and how much tax you pay. This makes it important to consider your financial circumstances and retirement goals, when deciding how to take your benefits.

13. Lifestyle Considerations in Defined Contribution Pension Planning

Your pension pot is designed to provide the income you need in retirement, matching your lifestyle goals and how much income you’ll need to support this. 

This might include all the basic areas of day to day essentials, as well as extras like holidays or looking after loved ones. For instance, your savings may allow you to go on European holidays or long haul trips. 

Your pension pot size will also depend on how long you expect to live after retirement. Most people underestimate their lifespan, potentially leading to a shortfall in pension savings. Consequently, you want to ensure you have enough to support you in later life.


1. How does a tax-free lump sum work in personal pensions?

In personal pensions, a tax-free lump sum is a major benefit you can access after the age of 55. This involves taking up to 25% of your pension pot in one go, meaning that you won’t have to pay any tax on this portion of your savings, which can be a significant amount.

The rest of your pension pot remains invested and potentially continues to grow. You can draw an income from it, buy an annuity, or take further lump sums out, depending on your personal preferences and retirement lifestyles.

2. Can pension contributions vary depending on the member’s retirement date?

Yes, pension contributions vary depending on the member’s intended retirement date. As you get closer to retirement, you might increase your contributions to boost your pension. In your workplace pension scheme,this typically happens automatically.

For example, you might begin by contributing a small percentage of your salary. As your salary increases over time, you may choose to match this increase in your contributions. This strategy could help you to build a larger pension pot by the time you retire.

dc plan

3. How does a final salary pension differ from a money purchase pension?

Final salary or defined benefit pensions provide an income in retirement based on your end salary and service. Although they were once common, they are now typically only found in the public sector.

On the other hand, a money purchase pension, also known as a defined contribution pension, is based on how much has been contributed to your pension pot and how well the investments perform. This is more popular in the private sector and doesn’t guarantee a certain income in retirement.

4. How does a civil partner benefit from a defined contribution pension?

In the event of your passing, your defined contribution pension can benefit your civil partner or spouse. They may be able to withdraw a lump sum or a regular income from your pension, the benefits depending on the specific terms of your pension scheme.

It’s important to ensure that your pension provider has up-to-date details of your civil partner for them to receive any benefits. Also, it’s advisable that the terms of your pension scheme detail the benefits it provides to dependents.

5. Can I retire whenever I want with a defined contribution pension?

The date you can retire depends on several factors. With the majority of defined contribution pensions, you can start taking money from your pension pot at age 55. Alternatively, the exact age might depend on your specific pension scheme and your employment circumstances.

It’s also worth considering how much income you’ll need in retirement and how long your pension pot can provide that income. The amount in your pension pot and how it’s invested can influence how long your money lasts. Therefore, making informed decisions which factor in your personal circumstances can help you to enjoy a comfortable retirement.

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Meet the author

William Jackson

William is a leading writer for our site, specialising in both finance and health sectors.

With a keen analytical mind and an ability to break down complex topics, William delivers content that is both deeply informative and accessible. His dual expertise in finance and health allows him to provide a holistic perspective on topics, bridging the gap between numbers and wellbeing. As a trusted voice on the UK Care Guide site, William’s articles not only educate but inspire readers to make informed decisions in both their financial and health journeys. 

Review of Article

This article has been reviewed by Saq Hussain, who is a pension and financial expert, with over 25 years experience of the financial services industry. Saq has regualrly featured in the UK press commentating on financial and specifically pension and retirement related issues. 


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