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What are the “ingredients” in your pension pot?

Jan 15, 2015 by

What are the “ingredients” in your pension pot?

Your pension pot consist of four main components. Each of them influences the size of your future pension.

Although, two of these factors are entirely managed by you, giving you the choice to ensure not only basic but the required by you funding of your after retirement life. These are your contributions and investment return.

The term pension pot is used widely with the meaning that these are your accumulated savings for your future pension. This generic explanation is not able to give you any detail what exactly “ingredients” are included in your pension pot and how precisely you may enjoy your delicious “pension dish”.

If we want to make more accurate definition we will find out that the pension pot is nothing but your defined contribution pension. In other words, this is a sum of money which includes:

  • Your contributions for pension
  • Your employer’s contributions for your pension
  • Contributions from the government in the form of tax relief
  • Investment returns.

It is good to mention that in some cases contributions from an employer may not be applicable but all other factors entirely build up your pension pot in the way you manage to build it up.

As seen above, almost all of these addends are entirely in your hands to manage. Even the contributions from the government in the form of tax relief are not constant, but variable. They depend on the size of your pension pot and some other factors like your age and the proper pension planning.

The aforementioned definition of the pension pot clearly states that the term is related to the defined contribution pension. Seems, the golden pot may be available only if you have defined contribution pension plan.

This is reasonable, since the defined-benefit pension plans have almost zero risks and respectively, they bring lower returns.

In the light of the new pension reform in UK, one of positive aspects of the new regulations is exactly the fact, that you can make a transfer from defined-benefit pension plan to a defined-contribution pension plan. An useful source of information, related to these two options for your pension are presented by Alec Maclaren in proinvestorblog.com.