Chartered Financial Planners

DB vs DC Pensions

Posted By on June 18th, 2021 in Blog, Financial Advisor, Financial Advisor Farnham

Card image cap

 

There can be a lot of confusion around the difference between a Defined Benefit and a Defined Contribution pension plan. In this article we will explain how they differ from each other.

Company pensions are generally categorised as being either a defined benefit or a defined contribution. The main difference is that a defined benefit pension plan sets out the specific benefit that will be paid to the retiree. This calculation will take into account factors such as the number of years an employee has worked at the company, and their salary. This then dictates the pension and/or lump sum that will be paid on retirement.

In contrast, a defined contribution pension (DC) is an accumulation of funds that makes up a person’s pension pot. The member of staff will contribute a portion of their salafy to a pension scheme. Usually, though not always, the employer also contributes, and the contributions are invested in a fund in order to provide retirement benefits. There is a tax relief on this type of pension, and the benefits at retirement will depend on a number of different factors such as the contribution levels, how the investment fund has performed, plan charges and fees, as well as the annuity rates available when you retire.

How to Decide?

As discussed, the main difference between a defined benefit scheme and a defined contribution scheme is that the former promises a specific income, and the latter depends on factors such as the amount you pay into the pension, and the investment funds performance.

When choosing a pension plan there will be numerous options available to you. Whether you are an employer or an employee, an investor or a total novice, our financial planning team can help you with Defined Contribution and Defined Benefit pension advice, so that you can choose the best pension for you.

Get in touch...