What is a defined contribution pension?

Anyone who earns more than £10,000 a year will be automatically enrolled into their company’s workplace pension, and between their own and their employer’s contributions, at least 8% of their salary will go into their pension each month.

If you earn less than £10,000 a year you will not meet that auto-enrolment threshold, but this doesn’t mean you can’t join your company’s defined contribution pension. You can ask your employer to enroll you in your workplace pension scheme, and they can’t refuse. To read more about this, have a look at our article Can I join my workplace pension scheme if I’m on a low salary?

You are able to opt out of the scheme if you want to, but it’s worth noting that the aim of paying into your company scheme in the long term is to reduce your reliance on state pension, which alone is unlikely to provide you with a comfortable retirement.

Consumer group, Which? recently published some research which found that a comfortable retirement for a couple costs around £26,000 a year and £19,000 for a single person. This includes the maximum state pension which is currently £9,339 a year. Based on a retirement of around 20 years, to achieve this level of income you would need to build up a pot of anywhere between £154,700 and £305,710 (depending on how you choose to receive your retirement income). Read our article Can you afford to retire? to find out more.

Author: wpadmin

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