Finance glossary
Defined Contribution Pension
Also known as: DC pension, Money purchase pension
In simple terms
A defined contribution pension builds up a pot of money from your contributions and any from your employer, invested to grow. What you get depends on how much goes in and how the investments do.
On this page
What does defined contribution mean?
A defined contribution (DC) pension builds up a personal pot from the money paid in by you, your employer and the government (through tax relief), which is then invested. Most modern workplace and personal pensions are DC.
Unlike a defined benefit pension, the final amount is not promised — it depends on contributions, investment performance and charges.
How a defined contribution pension works
Contributions are invested, usually in funds, and the pot grows (or falls) with the markets. At retirement you choose how to use it: take up to 25% tax-free, then use drawdown, buy an annuity, or take lump sums, with the rest taxed as income.
You carry the investment risk, so the value can go up and down, especially in the short term.
How could this affect me?
A DC pension gives flexibility at retirement but no guarantees, so how much you pay in and how it is invested really matter. Reviewing contributions and fund choice over time can significantly change the outcome.
As you near retirement, many people reduce risk gradually so a market fall just before you stop working does less damage.
Things to watch out for
- The pot value is not guaranteed — it can fall as well as rise.
- Leaving old pots forgotten can mean high charges and poor investments.
- Taxable withdrawals can push you into a higher tax band in a single year.
Know your rights
- Contributions receive tax relief and the pension grows free of UK income and capital gains tax (GOV.UK).
- From the normal minimum pension age you can usually take 25% tax-free (subject to the lump sum allowance).
- Free guidance from Pension Wise/MoneyHelper; complaints to the Financial Ombudsman Service or The Pensions Ombudsman.
General information, not personal advice
Consumer Credit is an independent information service. We do not provide regulated financial advice or sell financial products. For advice on your own situation, speak to an appropriately authorised firm or a free service such as MoneyHelper. About Consumer Credit.
Sources
We checked this page against these official and authoritative sources.
- MoneyHelper, Defined contribution pension schemes (opens in a new tab). Accessed 22 Aug 2026.