It is a question often asked – what is the difference between a defined benefit and defined contribution pension? This can be confusing for people unfamiliar with industry terms, or those unclear about the type of pension they have. Below we highlight the major differences between the two.
What is a defined benefit pension?
A defined benefit scheme is one that provides a regular income for life once you retire. This is based on how many years you have worked for your current employer and your salary. This is then multiplied by an accrual rate – often 60ths.
This type of scheme means that you can confidently plan for your retirement and long term financial future. However, it doesn’t give you a lot of flexibility in terms of how you can access your funds.
What is a defined contribution pension?
With a defined contribution scheme you and your employer will pay into the fund and the size of the pot come retirement will be dependent on the contributions made.
Unlike a defined benefit scheme the value of pensions and the income they produce can fall as well as rise so you may get back less than you invested. That being said this type of scheme is more flexible, as with pension freedoms you are able to take a 25% tax free cash sum from age 55.
Get the right advice
When it comes to discussing your pensions it’s important to get the right advice. Here at Pensionlite we pride ourselves on our years’ of experience and ability to build close relationships with our clients.
We also set out all our fees in a clear and concise recommendation report so you know each and every step of the way exactly what you will be charged. If you need help with your pensions why not contact one of the team today – alternatively you can download our guide to pensions booklet.
The value of your pensions, investments and the income they produce can fall as well as rise. You may get back less than you invested.
Transferring out of a Final Salary scheme is unlikely to be in the best interests of most people.