Defined Contribution (DC) pension schemes

In a Defined Contribution (DC) scheme, your pension depends on the how much you and your employer (if applicable) contribute to it and the growth of the underlying investments. Your income in retirement will be dependent on how you choose to draw it. Although you are a member of a defined benefit scheme you may have previous pensions from other employment or you may be paying into AVCs which generally are defined contribution so its important to understand how they work. Here’s how it works:

• Employer and employee contributions: Contributions are made to your pension pot in a tax-efficient manner. These contributions are invested.
• Access age: You can access your pension from age 55 (rising to 57 from 2028).
• 25% tax-free lump sum: You can take up to 25% of your pot as a tax-free lump sum called a Pension Commencement Lump Sum (PCLS) subject to HMRC limits.
• Tax-free investing: Tax relief at your marginal rate on contributions and no tax on any growth while money in held within a pension.

Income Options for DC Schemes

When you retire, you can choose how to use your pension pot:

• Flexible income (drawdown): Take money as you need it, taxed under normal Income Tax rules. If you don't take the full PCLS up front, a flexible income strategy could include a proportion of tax-free cash.
• Uncrystallised Funds Pension Lump Sum (cash lump sums): Withdraw all or part of your pension pot as needed. Generally, 25% will be tax-free and 75% will be subject to income tax.
• Lifetime Annuity: Convert your pot into a guaranteed income for life.

It’s worth noting that not all of the options are available from all pension schemes and you may be able to use a combination of these options to access your retire income. For details of which income options you can access from your scheme, speak to the provider or ask about these on your guidance call with my wealth.

You may also have access to a DC pension in the form of an AVC. Additional Voluntary Contributions (AVCs) allow you to build up a separate pension pot alongside your main pension scheme. They offer employees the option to top-up their pension savings.

Retirement Expenses: Are You Prepared?

Now that we have looked at how you build up workplace pensions and the State Pension, lets look at what your retirement might look like and how much you might need.

Not all retirements are the same and income needs will vary for each of us, depending on what we have planned. The Pensions and Lifetime Savings Association have created a guide to the costs you may expect in retirement based on 3 different income levels.

A 'minimum' standard ensures all your essentials are covered, while leaving room for occasional indulgence and social engagements. You could be able to enjoy a domestic holiday once a year, perhaps dine out once a month, and do some affordable leisure activities.

For this, a single person would need a minimum of £14,400 per year and a couple would need a minimum of £22,400 per year.

Now, let's explore the 'moderate' approach resulting of bolstered financial stability and flexibility. With this income level, you may be able to elevate your lifestyle with an annual international holiday, enjoy meals out a bit more and have the financial ability to pursue personal interests and hobbies with greater ease.
For this, a single person would need a minimum of £31,300 per year and a couple would need a minimum of £43,100 per year.

If you can save enough to afford a comfortable lifestyle, your financial stability would allow you to be more spontaneous with money, indulging in occasional luxury treatments, exploring global destinations, and enjoying periodic breaks closer to home—all while maintaining a balanced and fulfilling retirement.
For this, a single person would need a minimum of £43,100 per year and a couple would need a minimum of £59,000 per year.

MoneyHelper have created a useful calculator where you can put in your current savings, earnings and pension contributions and it will show you an idea of what your retirement income could be, depending on when you retire, it can also show you the gap between your desired retirement income and current provisions so you can increase your contributions if needed.

Key Actions for Your Pension

Here are some steps you can take to secure your financial well-being:

• Consider your retirement age: Ideally, when would you like to retire? Calculate if you need to save more into your pension to reach that goal.
• Are your savings on track: Collate all of your pension information, including from other workplaces so you have a good overview of your current position.
• Make extra pension savings: Consider increasing your contributions if possible or making AVCs.

By following these steps, you can ensure that your pension and financial planning are aligned with your retirement goals.