Defined Contribution v Defined Benefit pensions – what are the trends?

Date Published: 14/06/2019 12:35

For the first time ever more people are now paying into Defined Contribution (DC) schemes than into Defined Benefit schemes.

According to the Office of National Statistics (ONS), in 2018 employee contributions into DC schemes reached £4.1bn, compared with £32.2bn going into DB schemes.

And with auto-enrolment pension contributions going up in April 2019, the trend of more money going into DC schemes rather than DB looks set to continue.

Defined Benefit pensions, also known as final salary pensions, guarantee to pay out a defined amount based on your salary. Usually the amount is based on an accrual rate, a fraction of your final salary, which is multiplied by the number of years you have been a member of the pension scheme.

But DB schemes are becoming scarce. People are living longer and so employers are finding themselves liable to pay out more. In the public sector there is a massive shortfall between what retirees are entitled to from their DB scheme and what is actually in the pot. But there are no plans to not pay pensioners – so don’t worry!

The pay out from Defined Contribution pensions on the other hand depend on how much is paid in and how much those contributions grow. The contributions from you and your employer are usually invested in a variety of asset classes. There can be differing levels of risk, as with any investments, but the goal is to see the fund grow.

Then when you retire you can convert how much you want into an annuity; take the whole lot as a lump sum, with 25 per cent being free from tax, or you can take lump sums out as you wish; again with the 25 per cent rule.

Whether you have a DB or DC pension (or a mix of the two) it is important to plan ahead and be realistic about what is in the pension pot. After all, as our MD Jillian Thomas says, retirement is either the longest holiday you will ever have or the longest period of unemployment.

No individual investment advice is given, nor intended to be given in this article and liability will be accepted in respect of any action you may take as a result of reading this article. If you are unsure you are urged to take independent investment advice.

For more information or advice, please get in touch on 01246 435 996

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