When planning for retirement, it’s important to review your workplace pension scheme rules and income to avoid any hidden surprises. Employer-based pensions, or workplace pensions, are broken down into two categories: Defined Benefit (DB) and Defined Contribution (DC). It’s important that you understand the difference between the two, so you know exactly what you’re entitled to and when.
At Shalchi & Partners, we make pensions and retirement planning simple. Read our blog to learn the difference between Defined Benefit and Defined Contribution pensions and book a meeting with our independent financial advisors to learn more about your retirement options. We make money work for you.
Difference Between Defined Benefit and Defined Contribution Pensions
The main difference between DB and DC pensions is that one promises a guaranteed income for life, whereas the other depends on a variety of factors and doesn’t promise a guaranteed retirement income.
Defined Benefit Pensions
A Defined Benefit pension, or Final Salary, provides a guaranteed income for life once you turn between 60 and 65 years of age. Once you reach that age, you’ll receive a predefined income until you die, which is determined based on how long you worked for the company and the salary you were paid. Keep in mind that DB pensions are linked to scheme rules and are subject to change at any time.
Defined Contribution Pensions
A Defined Contribution pension, or Money-Purchased pension, does not guarantee you an income for life and depends on a variety of factors, such as how much you contribute to it, which DC plan fees you have to pay, how your investments are performing and the annuity rate when you go to retire. DC pensions act as a pot of money that can be withdrawn from directly or used to purchase annuities. You would contribute part of your salary each month into your DC pension and your employer would match up to a certain amount or percentage to help you save for retirement. It’s important to note that Money-Purchased pensions do qualify for tax relief.
Still not sure which retirement plan is right for you? View our complete breakdown and comparison of Defined Benefit and Defined Contribution pensions below. We compare every factor to help you choose the workplace pension scheme that’s right for you. Visit our Live Chat today to get the discussion started. Shalchi & Partners can help you grow and protect your retirement savings.
| Defined Benefit |
Defined Contribution |
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Retirement Age |
Contingent on scheme rules, but you can typically retire between 60 and 65 years of age. Early or late retirement is usually possible, but you will receive less or more of an income for every year you retire early or late. |
You decide when you want to retire. You can withdraw funds from your pension as early as 55 years of age. |
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Income or Lump Sums |
Guaranteed income until you die. You can ‘sacrifice’ a portion of your annual income for an initial lump sum. Keep in mind that once income is in payment, there is little to no flexibility. |
You can withdraw lump sums from your pension whenever you need once you turn 55 years of age. DC pensions provide flexibility, allowing you to take more of an income when you’re younger and less when you get older. You can also take a smaller income until you retire if you begin working less hours. DC pensions even allow you to buy an annuity with your funds, although this option is becoming less popular due to low interest rates. |
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Inflation |
Inflation will have a statutory increase from the date that you left the company until the day you die. |
DC pensions don’t have inflation increases. The fund is invested and will only ever be worth the amount that’s been paid in and the underlying investments. |
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Death Benefits |
All DB schemes are different, but typically 50% of funds will be left for your spouse on death as an income until they die. Children will not receive anything unless they’re enrolled in full-time education. |
100% of your funds is left behind for any chosen beneficiary, such as children, nieces, nephews and grandchildren. |
Disclaimer: Shalchi & Partners Limited is authorised and regulated by the Financial Conduct Authority. The value of investments can go down as well as up.
