Defined-Contribution Scheme
In a defined-contribution scheme, employees (and employers, if the employer chooses to make contributions) contribute annually to a pension pot. Typical employer contributions are between 2% and 10% of the employee's salary. The ultimate payout is determined by how much was paid in and how well the pension fund's managers invested the contributions. This payout is used to purchase an annuity, which pays a monthly income for the rest of the retiree's life, although up to 25% of the pension pot may be taken instead as a lump sum upon retirement. The most common type of defined-contribution plan is also known as a money-purchase scheme.
