Many DC (defined contribution) pension schemes send correspondence to people that are signed up with them five years before they are due to retire, with options as to what they can do with their pension and retirement planning. If you’re signed up to a DC pension scheme, you will need to decide when you want to retire, your retirement options, what to do if you have a small pension pot, whether or not to consolidate more than one pension pot, and whether or not you want to transfer your pension.

If you’re signed up to a DC pension, you can either keep the scheme you’re signed up to or transfer to a different scheme. Out of these two options, you can then decide whether or not to keep your pension pot where it is, get an annuity, flexi-access drawdown, take your pension pot in one lump sum, or whether to take your pension pot in a number of lump sums.

If you have a DC pension, you save up a pot of cash to provide an income for yourself during retirement. Unlike defined benefit (DB) pension schemes which promise a specific amount of income for your retirement, the income you receive through a DC scheme is based on the amount you pay in yourself, how much your employer pays in, how you choose to retire, how the fund is invested and any tax relief you are due to receive. If you have a DC scheme through your employer, your employer will deduct your DC contributions from your monthly pay cheque. If you have a DC scheme that you’ve set up for yourself, you’ll need to remember to make regular contributions.

Do you require financial advice about your DC pension? Are you thinking of a DC pension transfer? Financial Advisor UK offers a national network of fully FCA-registered and approved professionals and an easy matching service to put you in touch with the right professional advice for your circumstances. Our advisors can also search the market to help you find the best deals and pension providers available.

When you retire – options for DC pension pots

When you turn 55 you can use your DC pension pot however you wish. Options include:

• Taking the whole pension pot in one go. 75% of this will be subject to income tax at the normal rates. Depending on the size of the sum, a large lump sum could place you into a different tax bracket for the year.
• Take the pension pot in a few lump sums. These lump sums will also be subject to income tax, with 75% of funds being taxed.
• Take 25% of your pension fund and then use the rest to provide you with a taxable income (annuity) or drawdown.

The final value of your DC pension pot depends on:

• How long you’ve saved for and the contributions you’ve made
• How much you take as a lump sum
• How well invested your pension is
• How much your employer pays in
• Annuity rates
• Pension provider charges

Should I stay in my DC pension scheme?

You should carefully consider whether or not to transfer out of a DC pension scheme. If your employer pays into it, it is essentially a pay rise that you will receive later on when you retire. Unless you cannot afford to make contributions to the fund because you are financially struggling, it is advisable to stay in the scheme. In the long-term, contributions your employer makes may increase. If you change jobs while working, you stop paying into the fund and your fund remains where it is (known as a preserved pension).

If you have decided that you don’t want to remain in a DC pension scheme, you have the option to transfer it to a new employer, a stakeholder or a personal pension fund. You need to figure out the costs associated with this transfer, and whether it will provide you with as much capital in the long run.