A defined contribution pension scheme (DC) is an employer sponsored pension scheme, where Employers make pension contributions to a pension for employees who also contribute to the pension plan. Such a scheme aims to give you sufficient income to live comfortably in your retirement.
There are many advantages associated with defined contribution pension schemes including;
- Tax-free growth of investment returns within your pension
- Tax relief on your contributions
The retirement value of such a defined contribution pension fund depends on the amount of contributions the Employer & Employee pay into the fund over the years, and the growth on the funds pre-retirement.
What are the Retirement Options?
At retirement everybody has the option of taking a tax-free lump sum.
The level of tax-free lump sum will depend on the value of the pension fund which has accumulated.
For example, if you have built up a defined contribution pension fund value of €400,000 over the years, you may be able to:
- Take a tax free lump sum of €100,000 at retirement,
- Use the remaining €300,000 in your fund to provide you with an income for the remainder of your life. Based on a return of, say, 4% net on a pension fund in the value of €300,000 pension fund; this would equate to an annual income of €12,000 gross of tax per annum.
In summary, defined contribution pension schemes are an essential part of your income in retirement replacement strategy. Detailed financial planning advice should be sought as to which plan suits you best and retirement options.