Defined Contribution Pension

Defined Contribution Pension

A defined contribution pension (DC) is a type of pension plan in which the contributions made by the employee, the employer, or both are fixed, but the ultimate retirement benefit is dependent on the performance of the investments in the pension fund. This type of pension is sometimes referred to as a “money purchase” pension.

In a DC pension, the employee and employer contribute a fixed amount to the pension fund on a regular basis. These contributions are invested in a variety of assets, such as stocks, bonds, and mutual funds. The value of the pension fund at retirement depends on the performance of these investments, as well as on the amount of contributions made over time.

DC pensions are becoming increasingly common in the UK as more employers move away from traditional defined benefit pension plans, which provide a fixed retirement benefit based on the employee’s salary and length of service. Defined contribution pensions offer more flexibility and control to both the employee and the employer, but they also carry more risk, as the final retirement benefit is not guaranteed.