Defined contribution pension schemes
These pensions are also known as "money purchase schemes". Your employer decides which type of scheme you are offered. In a defined contribution pension scheme, your pension pot is put into various types of investment, such as shares (shares are a stake in a company). It is expected to grow over time.
Your pension pot is invested in this way because in the long run it usually gives a better return than a savings account. Over the years, the value of investments can go up and down. But if the value goes down in the short term, it is likely to recover in the long term.
With some defined contribution pension schemes, you may be able to make decisions about how your money is invested. But you don’t have to – all pension providers have to offer a fund that meets the needs of most people and this is where your money will be automatically invested. Your pension provider can give you more details.
Some pension schemes gradually move your money into lower-risk investments as you get nearer retirement age. If it doesn't happen automatically, you may be able to ask for this. Your pension provider can give you more details.
The pension scheme provider investing your pension, may charge you. Often this is an amount based on the value of the pension. You may see this on your pension statements or on other pension scheme information.
The amount you get when you retire
The amount you get at retirement usually depends on:
- how much is contributed
- how long you contribute
- how well the investments performed
The earlier you start and the more you, your employer and the government put in, the more money you are likely to have when you retire.
Normally when you retire you take some of your pension pot as a tax–free cash lump sum. You use the rest to buy yourself a regular income, on which you pay tax.
Defined benefit pension schemes
These pensions are also known as "final salary" or "salary-related" pensions. For defined benefit schemes, the amount you get at retirement is based on:
- how long you have been a member of the pension
- your earnings
When you retire you can take some of your pension as a tax–free cash lump sum. The rest you get as regular income, on which you pay tax.
How this income is worked out varies from scheme to scheme. The pension scheme provider will have information on this.
Your pension scheme provider will usually send you a statement each year to show you how much is in your pension.
You can also ask them for an estimate of how much you'll get when you take your pension.