Pension Transfers & Defined Benefit Pensions UKDefined Benefit vs Defined Contribution Pension
Understanding the difference between DB and DC pensions. Final salary vs money purchase schemes, and what each means for your retirement.
Understanding the two main types of workplace pension and what they mean for your retirement.
For the wider cluster covering workplace pensions, auto-enrolment and public-sector schemes, use the main Workplace Pensions hub.
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) |