Defined Benefit or Defined Contribution pension?

Pensions are one area of finance that seem to cause the most confusion in the general population. People often think all pensions are complicated and this can put them off thinking about retirement savings until later in life, by which time the opportunity to maximise retirement income has shrunk significantly.

One common question is ‘What’s the difference between a Defined Benefit and a Defined Contribution pension?’

Defined Benefit (DB)

The defined benefit pension is a scheme which is managed by employers and, in fact, has largely been replaced by defined contribution schemes.

If you have a defined benefit pension, what you receive in retirement is determined by what you were earning in the job, and not what you were contributing. You will receive a guaranteed % of your final salary (or an average salary over your career with that employer) on leaving the company, payable each month for life from a set retirement age. And given we are living longer, this can be a very valuable benefit.

This type of pension is usually index-linked, so the payments will increase each year with inflation.

Defined Contribution (DC)

Defined contribution schemes, also known as money purchase pensions (or as I like to call them - money pot pensions) do not have a set % pay out.

What you receive in retirement depends on what you contribute (hence the name Defined CONTRIBUTION).

How quickly the pot grows depends on the amount you contribute, what you are invested in, what falls in values it suffers, and the compounding effect of interest. (Compounding is when you re-invest your earnings, and earn more money on your earnings and so on – like a snow ball rolling down a hill).

So, you can see that there are a variety of options and one size doesn’t fit all.

Do you need help understanding your pension options? I am happy to help, so if you have any questions please get in touch.

The value of a Pension with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up.  You may get back less than you invested.