Pensions can be a tricky subject at the best of times, not least because of the vast array of options available to the average person. From receiving a state pension to setting up a SIPP, the entire pension system can seem labyrinthine, although most people set up a work pension.
Defined contribution pension plans are a fairly popular option, but they also have some issues which may need resolving. Here is an explanation of how they work, and how they may be as a pension option.
What is a Defined Contribution Pension Plan?
Much like any other private pension, a defined contribution pension plan involves paying into a pension pot over time, with an employer usually matching contributions. Key to this type of scheme is the fact that the end income which it will provide can greatly vary, depending on a number of factors.
The amount of money paid into the pot over time is the biggest influencer of how much will be paid out, but how well the fund performs in a financial sense is also incredibly important. This is different to defined benefit schemes, which provide a guaranteed amount when they mature.
Whilst defined contribution pension schemes are a good way to build up a potentially significant amount of money in the long run, they make it very difficult to plan ahead for retirement, given that there are no guarantees for how much income they will provide.
It is also difficult to track how much money has been accumulated through such a scheme, as the amount is likely to be constantly changing (depending on market conditions).
Are They Effective?
There are now specialist companies, such as Hymans Robertson, which are providing effective HR solutions by using innovative, cutting edge technology. It is this technology which is likely to be able to revolutionise the way defined contribution pension plans are managed, potentially allowing employees to keep track of their contributions with greater ease.
In terms of the effectiveness of defined contributions plans, different people have different requirements, but they are particularly suited to those who do not mind taking on a bit more risk with their retirement fund.
So, for those considering taking up a defined contribution pension plan, there is plenty to think about. The risks and problems with this plan may well be offset by the introduction of new technologies, so it is worth keeping an eye out for any developments in the coming years.