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) |