A Defined Contribution (DC) pension scheme is a retirement savings plan where contributions are invested, and the final pension depends on investment performance.
Why is Option A Correct?
The final retirement income is uncertain because it depends on investment returns, contribution levels, and annuity rates at retirement.
Unlike Defined Benefit (DB) schemes, where retirees receive a fixed pension, DC schemes do not guarantee a set payout.
How Defined Contribution (DC) Schemes Work:
Contributions are made by employees (and often by employers).
Funds are invested in stocks, bonds, or mixed assets.
Upon retirement, the individual may withdraw lump sums, purchase an annuity, or opt for pension drawdown.
Why Not Other Options?
B (Employers never contribute) → Incorrect. Many employers do contribute, particularly in workplace pensions (e.g., auto-enrolment in the UK).
C (Capital gains tax applies) → Incorrect. Pension funds grow tax-free (no CGT on gains).
D (Employees always contribute more) → Incorrect. Employer contributions vary by scheme—some match employee contributions, others contribute less.
Chosen Answer:
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