What is a defined contribution pension?

Most modern pensions fall into the category of defined contribution. This is where the ultimate outcome depends on how much is paid in, where it is invested and then what type of income generation is selected at retirement. Contributions are generally made as cash and tested against the annual allowance for the individual at the level of the contribution.

For personal contributions, tax relief is usually available at the basic rate of income tax, with any remaining tax relief reclaimable through self-assessment. Importantly, tax relief is not withdrawn simply because the contribution exceeds earned income for the year, meaning it is still possible for a non-taxpayer to reclaim basic rate tax, even if it was never actually paid. Personal contributions can only be made tax efficiently up to the earned income for the year – excess contributions then attract an annual allowance charge.

Contributions made by an employer are, if the contribution passes the “wholly and exclusively” test, relievable against corporation tax and employer national insurance. Such contributions are not limited by relevant earning in the same way as personal contributions, but are still tested against the annual allowance.