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If you’re approaching retirement, chances are most of your pension savings are held in a Defined Contribution (DC) pension. These pensions now form the backbone of retirement planning for many professionals, but they’re often misunderstood.
In this blog, which accompanies the Retire Well with Wealth of Advice podcast episode on DC pensions, we’ll walk through what a DC pension actually is, how it’s taxed, and the choices you face when it comes to turning it into retirement income.
A Defined Contribution pension is essentially a tax-efficient investment pot.
Unlike older-style Defined Benefit (final salary) pensions, there’s no guaranteed income. The responsibility for investment decisions and withdrawal strategy sits with you.
DC pensions are attractive largely because of the tax advantages:
Most people are limited by the Annual Allowance, currently £60,000 for most individuals, although this can be lower for high earners or those who have already accessed pension benefits.
Your pension pot is invested, often into a default fund if you haven’t made an active choice. These defaults are designed to suit the average member, not necessarily you.
Key points to consider:
Many workplace pensions gradually reduce risk as retirement approaches, but this may not align with how you actually plan to take income.
From age 55 (rising to 57 in 2028), DC pensions can usually be accessed.
The key rules include:
This means when and how much you withdraw matters just as much as how much you’ve saved.
There are three main ways to use a DC pension in retirement:
You take lump sums directly from your pension, with each payment split between tax-free and taxable elements.
You move funds into drawdown, take tax-free cash upfront if you wish, and then draw income as needed while the rest remains invested.
You exchange some or all of your pension for a guaranteed income for life or a fixed term.
Each option has pros and cons, and many retirees use a combination rather than a single solution.
Some of the most common DC pension pitfalls we see include:
Defined Contribution pensions offer flexibility and tax efficiency, but they also require careful planning. Investment strategy, tax planning, and withdrawal decisions all interact, and small mistakes can have long-term consequences.
If you’re unsure whether your pension is set up to support the retirement you want, getting professional advice can make a significant difference.
At Wealth of Advice, we help professionals make confident, informed decisions about pensions and retirement income.
If you’d like help reviewing your DC pensions or building a retirement plan, please get in touch to arrange an initial conversation.
If you want a better view of what your future could be, we'll have a chat and work out if we make a good fit for you and your financial picture.
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