Guide to Defined Contribution vs. Defined Benefit Pensions

Defined Contribution vs. Defined Benefit pensions

A Defined Benefit pension pays out a specified amount in retirement, and this is linked to the number of years’ service and the remuneration package that the pension member has earned. A Defined Contribution plan, on the other hand, builds up a retirement fund and the more that is paid in and the better the investment growth, the more the pension member receives in retirement. Both types of pension can receive contributions from employers and employees but the Defined Benefit scheme carries guarantees on the benefits the pension member receives and this is the major difference between the two types of scheme. You could look at it as the difference between whether the employee or the employer bears the investment risks. The employer bears the risk in a Defined Benefit scheme whereas the employee does so in a Defined Contribution scheme. In this article, Angela Maher, Acumen Managing Director compares Defined Contribution vs. Defined Benefit pension plans and provides advice for anyone considering a pension transfer.

Pros and cons of defined benefit pension plans

Defined Benefit schemes come with extremely valuable guarantees. Income is secure and it’s index linked, so it keeps pace with inflation. All the responsibility for the scheme rests with the employer and there’s a backstop in the shape of the Pensions Protection Fund if the employer fails. S Defined Benefit scheme will pay out for the whole of your life and also pay an income to a qualifying spouse when the pension member dies, so you can’t run out of money. Nobody wants to outlive their pension and have no money to fall back on.

On the other hand, you can’t access the “pensions freedoms” that have been available since 2015. The pensions freedoms mean you can access the pension fund in the way you want to, perhaps by taking some or all of the tax-free cash but leaving the income for some time in the future or deciding you want a different level of income than the Defined Benefit scheme would permit. Being able to control the level of income, taking more in the early years could be a factor. Maybe leaving a legacy for your children is really important or in some cases sadly, ill-health and a shortened life-expectancy means that the considering a Pension Transfer has value.

What happens when you transfer a defined benefit pension plan?

A Pension Transfer will move the fund into a Defined Contribution scheme, which then allows you to make your own decisions regarding investing the money and take the responsibility for paying income and cash when and how you want to. This could mean taking larger amounts in the early years of retirement, reducing the withdrawals when your circumstances allow you to do so in order to manage a tax liability.

Whether to transfer or not can be a life-changing decision. It’s essential that you get high quality, focused, personalised advice before transferring to make sure it’s right for you. It may not be. Pension transfers are not something to enter into lightly. Transferring to a Defined Contribution pension will allow you to make your own decisions about how you use the fund but you’ll give up the guarantees that the Defined Benefit scheme provides.

Transferring allows you to draw out large sums or even the whole of the pension fund- but beware, without proper planning, this can come with a very unwelcome tax bill! You can use the funds in the way you wish provided you’re happy to pay the tax on the withdrawals, of course. Many clients feel that transferring gives them an opportunity to pass on pension funds to their children or even help their offspring to take their first steps on the property ladder by accessing a larger lump sum. A Defined Benefit scheme doesn’t permit this sort of control and access.

Access pension transfer guidance at Acumen

The important thing to bear in mind is that there is no such thing as a “no-brainer” when it comes to considering whether a pension transfer is the right thing to do. Everyone is different and even if you know a group of people who are all transferring, this doesn’t mean it’s the right thing to do for you – and indeed, it may not be for them, if they haven’t got the right advice. It couldn’t be more important to get fully researched, specialist financial advice from a Pension Transfer Specialist firm, such as Acumen.

Our three-stage framework starts with a free of charge video that gives you an unbiased explanation of the key points to consider about whether a pension transfer is the right path to take. You’ll soon see that we’re focused on giving the right advice to you and your family and not aiming to “make a sale”.

For more information about Defined Benefit pensions or to discuss your pension in confidence, contact Acumen today on 0151 520 4353 or to arrange a meeting with one of our experienced pension advisers.

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