Defined contribution pension definition
A defined contribution pension scheme is one in which an employer, and sometimes the employee too, contributes an amount or a percentage of the employee’s earnings into an investment fund that’s then used to buy a pension when the employee retires.
For example, an employee may be required to contribute 5% of his or her monthly earnings to the pension scheme and the employer will also contribute 5%, meaning 10% of the employee’s earnings are contributed to the scheme each month. Some schemes allow the employee to choose how much they contribute to the scheme.
The final value of a defined contribution pension scheme on retirement will depend on the amount contributed, the investment returns the scheme has achieved, minus fees and charges for the administration of the scheme plus the cost of buying retirement benefits.
Alternative pension schemes include a defined benefit pension scheme, which guarantees the amount an employee will get through his or her retirement.