10 Differences between Defined Benefit Pension Schemes and Defined Contribution Schemes
Defined Benefit Pension Scheme
These pension schemes are a type of occupational pension scheme. Under a defined benefit scheme, there is typically a commitment to pay you a retirement income calculated based on years of service and salary. You would normally have the option to exchange a portion of that retirement income for a Retirement Lump Sum at retirement.
Under a defined benefit arrangement, you do not have your own pension fund as such. Instead the scheme comprises one large fund from which retirement income and Retirement Lump Sums are paid to members when they retire. Investment performance is more of a concern for the scheme and for the employer providing the scheme than it is for you. This is because your benefits are generally not affected even if the fund performs badly.
Defined Contribution Pension Scheme
Defined Contribution Pension Schemes are a type of Occupational pension scheme. Under a defined contribution scheme, you and your employer together contribute to build up a Retirement Account for you. This Retirement Account should grow over the course of your working life through investment growth and ongoing contributions. When you retire, you can use the Retirement Account to provide you with retirement benefits, such as a Retirement Lump Sum, an income for life in retirement (annuity) and/or an Approved Retirement Fund (ARF).
Under a defined contribution scheme, your retirement benefits depend on the performance of your own pension fund. There is no Guarantee or commitment to pay from your Employer.
In preparing this Chart below we are setting out the key risk factors associated with considering a possible transfer from a Defined Benefit Pension Scheme to a Defined Contribution Pension Scheme.
While the factors hereunder are not totally comprehensive they give you some points to consider prior to getting individual advice.
Negative Red reflects a reason to stay in your Defined Benefit Pension Scheme.
Positive Green reflects a reason to consider leaving your Defined Contribution Pension Scheme, after receiving advice.
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