What is the difference between a Defined Contribute Pension, Defined Benefit Pension, and State Pension?
Defined Contribution (DC) Pension (Workplace Pension, SIPPs, etc.)
What is a Defined Contribution Pension?
A Defined Contribution pension is a pension pot that you and/or your employer will contribute towards. You are responsible for the investment and management of this type of pension. More common workplace pensions are Nest Pension, People’s Pension and Legal & General pensions. Some are better than others, with varying charges and available funds.
How do I combine or transfer my pension?
Unless there are specific guarantees or benefits relating to your plan, you can simply provide your pension policy numbers to your new or existing pension provider, who will do the hard work for you. Different providers may require you to complete certain paperwork.
How much can I put into a pension?
In layman’s terms, you can put up to £60,000 gross (including tax-relief and employer contributions) into a pension, but only if you earn at least this much. This is called ‘relevant earnings’ and does not include things like rental income, dividends, and pension income. There are ways of adding more, such as ‘carry forward’ allowances.
When can I take it?
The most common age is currently 55, which will increase to 57 on the 6th April 2028. However, your pension may allow access before that depending on its legislation. You could also be able to take it early due to serious ill health.
How do I take money out of my pension?
The main three options are Flexi-Access Drawdown (FAD), UFPLS, and an annuity. The most common is FAD, where you can take 25% of the pot as tax-free cash and take the rest as taxable income in future. This may not be the most efficient option, and what you choose will depend entirely on your circumstances.
What happens when I die?
There may be some plan-specific perks, but it largely depends on when you die. If you die before 75, it can pass to your beneficiaries free of income tax. After 75, it will be taxed at the beneficiaries’ marginal income tax rate.
Some providers offer beneficiary drawdown pensions, which allow the beneficiary to control when they take it, and therefore the tax burden.
As of April 2027, pensions will be included in the estate and liable to Inheritance Tax (IHT). If the beneficiary is a higher-rate taxpayer in England and inherits a £100k pension liable to IHT, they may lose 40% to IHT, and then a further 40% to HMRC for income tax.
Defined Benefit (DB) Pension
What is a Defined Benefit Pension? (CARE, Final Salary)
Defined Benefit pensions provide a guaranteed income throughout retirement. How they accumulate varies; you may see something like ‘1/60’, which means that when you work for one year, at retirement age you’ll be paid 1/60th of your salary every year until death. This accumulates year on year.
Examples are NHS Pensions, Teachers’ Pensions, and Armed Forces Pensions.
Defined Benefit pensions used to be interchangeable with the phrase ‘final salary pension’. However, these pensions are very expensive, so the more common type now is ‘Career Average Revalued Earnings’ (CARE).
Can I transfer my pension?
Transfers are much more limited in this sector. You may be able to transfer a Defined Benefit to another Defined Benefit scheme and even move a Defined Benefit pension to a Defined Contribution pension, capturing the “Cash Equivalent Transfer Value”, but due to regulations and limitations, this is not currently commonplace.
Contributions
Depending on which scheme, your employer will, and you may, make contributions out of your salary to these pensions.
There may be ways of topping up or ‘adding’ a year through additional contributions.
When and how can I take my Defined Benefit Pension?
You will receive terms from the pension; one of the important details will be a ‘Retirement Age’. Most illustrations thereafter will be figures based on that age. Some pensions may allow you to take the Defined Benefit pension early and receive a reduced pension.
What happens when I die?
Defined Benefit pension death benefits are usually much more limited than their Defined Contribution pension counterparts due to the expense of providing them. Instead of the full value, your spouse or dependent will likely receive a percentage of the income. Once your spouse dies, it is likely that the income will then die with them.
State Pension
When do I get the State Pension?
The UK State Pension age is currently 66 for both men and women. A phased increase to age 67 is rolling out between May 2026 and April 2028 for those born from 6 April 1960 onwards, with a further rise to 68 being considered in future. You can check your State Pension age here: https://www.gov.uk/state-pension-age
How much do I get?
How much State Pension you get is all down to how many years of full National Insurance (NI) you have paid. For the newer State Pension, 35 years of NI contributions are needed, though you may need less if you were part of the previous State Pension. You can check your State Pension forecast here: https://www.gov.uk/check-state-pension
What is the Triple Lock?
The UK State Pension triple lock is a rule that guarantees payments rise every April by whichever is highest of three figures: average wage growth across the UK, inflation (measured by the Consumer Prices Index), or a flat minimum rate of 2.5%.
What happens when I die?
This is dependent on which State Pension you receive. On older schemes, your partner may inherit 100%. On the newer State Pension, it will only be the portion of ‘extra’ State Pension, which can be accrued by deferring the State Pension.
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