Building up a pot of money that can be used to provide an income in retirement

With a defined contribution pension, the member builds up a pot of money that they can use to provide an income in retirement. Unlike defined benefit schemes, which promise a specific income, the income the member might get from a defined contribution scheme depends on factors including the amount they pay in and the fund’s investment performance. If you have any questions about a contriution scheme, whether this is the best type of scheme for you then you should seek independent financial advice, we at Hutt Professional have financial advisers with many years of experience that would be able to offer you that financial advice.

How a defined contribution scheme work
Defined contribution pensions build up a pension pot using the members and their employer’s contributions (if applicable), plus investment returns and tax relief.

If they are a member of the scheme through their workplace, then the employer usually deducts contributions from their salary before it is taxed. If they have set the scheme up for themselves, they arrange the contributions themselves.

In work
The fund is usually invested in stocks and shares, along with other investments, with the aim of growing it over the years before the member retires. They can usually choose from a range of funds to invest in. It’s important to also remember though that the value of investments can go up or down.

In retirement
Commencing from 6 April 2015, a qualifying member will be able to access and use their pension pot in any way they wish from age 55.

They will be able to:

Withdraw up to 25% tax-free

Convert some or all of the remaining amount into
a regular retirement income (known as an ‘annuity’), and/or

Withdraw the remaining cash in stages or as one lump sum, subject to tax at their highest rate

Between 27 March 2014 and 6 April 2015, interim rules apply that give more choice than before about how much of the member’s pension pot can be cashed in. If you have any questions in regards to how the new rules that come into place in April could affect you and your pension then you should seek independent financial advice.

The size of the pension pot and amount of income received at retirement will depend on:

How much is paid into the pot

The length of saving

How much the employer pays in (if a workplace pension)

How well the investments have performed
What charges have been taken out of the pot by the pension provider

How much is taken as a cash lump sum

Annuity rates at retirement – if the annuity
route is chosen

Any other type of retirement income chosen

If you wish to seek independent financial advice on Defined Contribution Pension Schemes we at Hutt Professional have financial advisers with many years of experience, who would be more than happy to offer you indepedent financial advice on your pension or pensions and the schemes that you are in. If you are located in Leamington Spa or surrounding areas then please do not hesitate to contact us.