Defined Benefit vs Defined Contribution Pension

Understanding the two main types of workplace pension and what they mean for your retirement.

Quick Comparison

Feature	Defined Benefit (DB)	Defined Contribution (DC)
Retirement income	Guaranteed	Depends on pot size
Investment risk	Employer bears	You bear
Final amount	Known formula	Unknown until retirement
Common in	Public sector	Private sector
Also called	Final salary, career average	Money purchase

Defined Benefit Pensions

How They Work

Element	Details
Promise	Specific income in retirement
Calculation	Based on formula
Factors	Salary × years × accrual rate
Investment	Employer manages
Risk	Lies with employer

Types of DB Pension

Type	How It’s Calculated
Final salary	Based on leaving salary
Career average	Based on average salary
CARE	Career Average Revalued Earnings

DB Calculation Example

Final Salary Scheme	Calculation
Final salary	£50,000
Years in scheme	20
Accrual rate	1/60th
Annual pension	£50,000 × 20 × 1/60
=	£16,667/year

Common Accrual Rates

Rate	Per Year of Service
1/60th	1.67% of salary
1/80th	1.25% of salary
1/57th	1.75% of salary (NHS)

DB Benefits

Benefit	Details
Guaranteed income	For life
Usually inflation-linked	CPI/RPI increases
No investment decisions	For you
Often spouse pension	Included
Predictable	Know what you’ll get

DB Drawbacks

Drawback	Details
Less flexible	Set income
Employer dependent	If they fail
Can’t vary income	Tax planning harder
Tied to one employer	To maximise benefit

Defined Contribution Pensions

How They Work

Element	Details
Contributions	You and employer pay in
Investment	Money invested in funds
Growth	Depends on performance
Final pot	Contributions + growth
Risk	You bear it

DC Calculation

What Determines Pot	Impact
Your contributions	More = bigger pot
Employer contributions	More = bigger pot
Investment returns	Can grow or shrink
Charges	Reduce final pot
Years contributing	More time = growth

DC Example

Monthly Contributions	Over 30 Years
You: £200
Employer: £150
Total: £350/month
Assuming 5% growth
Estimated pot	~£290,000

DC Benefits

Benefit	Details
Portable	Move jobs easily
Flexible access	Drawdown options
Tax planning	Control income
Investment choice	Some control
Inheritance	Pass on pot

DC Drawbacks

Drawback	Details
Investment risk	On you
Unknown income	Until retirement
Longevity risk	Might outlive pot
Requires decisions	Ongoing

Side-by-Side Comparison

Income Certainty

Scenario	DB	DC
Good markets	Same income	Higher pot
Bad markets	Same income	Lower pot
Live to 100	Same income	Pot may run out

Flexibility

Feature	DB	DC
Vary income	No	Yes
Tax planning	Limited	Better
Leave inheritance	Limited	Full pot
Access before death	Set income	Flexible drawdown

Employer Contributions

Type	Typical Contribution
DB (public sector)	20-30% of salary
DC (private sector)	3-10% of salary

Which Do You Have?

Signs of DB Pension

Indicator
Called “final salary”
Called “career average”
Statement shows projected annual income
Public sector employment
Long-established employer

Signs of DC Pension

Indicator
Shows pot value
Investment fund choices
Called “money purchase”
Auto-enrolment pension
Most modern workplace pensions

Public Sector Pensions

Main Schemes

Sector	Scheme	Type
NHS	NHS Pension	DB (CARE)
Teachers	Teachers’ Pension	DB (CARE)
Civil Service	Civil Service Pension	DB (CARE)
Local Government	LGPS	DB (CARE)
Armed Forces	AFPS	DB

Typical Terms

Feature	Public Sector DB
Accrual	1/54th to 1/57th
Retirement age	State Pension Age
Inflation linking	Yes (CPI)
Spouse pension	Usually 50%
Lump sum	Option to commute

Private Sector Reality

Changes Over Time

Era	Common Pension Type
Pre-1990s	DB (final salary)
1990s-2000s	DB closing to new members
2012 onwards	DC (auto-enrolment)
Now	Almost all DC

Why DB Disappeared

Reason	Impact
People living longer	More expensive
Investment risk	Companies can’t bear
Accounting rules	DB liabilities on books
Cost	DB much more expensive

If You Have Both

Managing Multiple Pensions

Strategy
Keep track	Of all pensions
Value DB higher	Than pot size suggests
Consider DB value	When planning DC contributions
Don’t transfer DB	Without advice

Valuing a DB Pension

Rule of Thumb	Calculation
Multiply annual pension	By 20
£15,000/year DB	≈ £300,000 DC equivalent

Transfers

DB to DC Transfer

Consideration	Details
Almost never advisable	For most people
Advice required	Over £30,000
Giving up	Guaranteed income
Scam risk	High in this area
Exceptions	Very specific circumstances

When Transfer Might Work

Rare Situation	Why
Terminal illness	Access money now
Very low transfer value	Relatively
Poor employer/scheme health	Insolvency risk
High value + short life expectancy	Get advice

Summary

Question	DB	DC
How much will I get?	Formula tells you	Depends on pot
Who bears risk?	Employer	You
Flexibility	Low	High
Generally better?	Yes (if available)	Standard now
Your responsibility	Stay in scheme	Contribute well, invest wisely

Key Takeaways
DB is valuable	Don’t transfer lightly
DC needs attention	Contributions and investments
Know what you have	Check pension type
Public sector	Likely DB (keep it)
Private sector	Likely DC (maximise it)