Defined benefit vs defined contribution: knowing what you've got

Not all pensions are the same, and the differences are fundamental. Broadly, workplace and personal pensions fall into two families - defined benefit and defined contribution - and knowing which you have shapes almost every retirement decision you will make.

A defined contribution (DC) pension is essentially a pot. You and often your employer pay in, the money is invested, and the value of your pot rises and falls with those investments. What you end up with depends on how much went in, how the investments performed, and the charges along the way. Most modern workplace pensions, personal pensions and SIPPs are defined contribution.

The key feature is that you carry the investment risk, and you have flexibility at retirement over how to turn the pot into income. The upside is control and flexibility; the responsibility is that the outcome is not guaranteed.

A defined benefit (DB) pension - sometimes called a 'final salary' or 'career average' scheme - works completely differently. Instead of a pot, it promises you a specific income in retirement, usually based on your salary and years of service. Increases before and after retirement depend on the scheme rules and may be capped, although many schemes provide some protection against inflation. The scheme, not you, carries the investment risk. These schemes are increasingly rare in the private sector but remain common across the public sector - the NHS, teachers, civil service, police, armed forces and local government among them.

A defined benefit pension is valuable because it provides a scheme-backed income for life, with increases determined by the scheme rules. That security is easy to underrate.

The two types call for different thinking. With a defined contribution pension, your attention is on how much you save, how it is invested, the charges you pay, and how you will draw it down sustainably. With a defined benefit pension, much of that is handled for you; the questions are more about when you can take it, how it is calculated, and how it fits alongside your other income.

People sometimes consider transferring a defined benefit pension into a defined contribution arrangement to gain flexibility or to change how it passes on. This gives up a guaranteed, inflation-protected income for an uncertain pot, and FCA guidance starts from the assumption that a transfer will be unsuitable unless it can be shown to be in the consumer's interests. The stakes are high enough that where a defined benefit pension is worth more than £30,000, you are generally required to take regulated advice from a specialist (a Pension Transfer Specialist) before transferring. It is a safeguard, and a sensible one: giving up a lifetime income is a decision that deserves proper scrutiny. Some unfunded public-sector schemes, such as the NHS and Teachers' schemes, generally cannot be transferred to a defined contribution arrangement.

Some people also have 'hybrid' arrangements that mix elements of both, or several pensions of different types built up over a career. Getting a clear inventory of what you actually hold is often the first, most valuable step in retirement planning.

We help you build a clear picture of every pension you hold and plan your retirement income around it. We don't advise on defined benefit transfers - if that's something you want to explore, we'll point you to a firm authorised to give that specialist advice.