In the United Kingdom, there are two different forms of pension schemes: Defined Contribution (DC) and Defined Benefit (DB). DB is a pension that is determined by your monthly salary and DC is a pension where the amount depends on the funds you contributed. Aside from the type of pension plans, their differences lie in their benefits and drawbacks. Before you make a financial decision regarding a UK pension transfer, you need to make sure that you have a good understanding of the retirement plan you are going to pick. Let’s take a closer look to find out more about the two.
1. Final income
If you are registered to the DB pension scheme, you can rest assured because you will undoubtedly receive the final profit from it. However, if you use a DC pension, it is conditional on whether you have successfully increased your investment value. It may rise or fall depending on how and where you allocate the funds.
2. Withdrawal time
Another thing to consider is when you can take out your retirement savings. DC pension allows its participants to withdraw their money when they turn 55 years old or older. On the other hand, the DB pension permits you to receive your pension funds in the age range of 60 to 65 years old. In some cases, it is possible to withdraw the money earlier or later than the predetermined time, however, the total of your investment revenue will be affected.
3. Risk bearer
You are indeed responsible for your own money. However, if you become a member of the DB plan, your employer can financially support and guarantee your pension scheme. It can be good for you because you don’t need to worry about not getting any pension funds in the end because it is secured by your company. But it also means that you don’t have a lot of control over your savings until you reach retirement age. Meanwhile, if you use a DC pension, you are the only one responsible for ensuring your investment profit. You can easily set aside a sum of money from your monthly wage to invest in the DC plan. If your employer wants to help, they are free to add some financial contribution up to a specific amount as agreed before. Keep in mind that they are not obligated to do so. If you look on the bright side, it will provide you with a more flexible solution. However, it requires a meticulous economic outlook and good technical and fundamental analysis of the share market. It is important to ensure that you don’t make any wrong decisions that will lead to a big financial loss.
Those are the three main differences between defined contribution vs defined benefit pension plan. It is crucial to take a serious consideration before you choose your scheme or before you switch to the new one, as they have their own advantages and disadvantages. Do your research to gain deep knowledge and understanding between the two or you can contact a reliable pension transfer specialist to ensure that you are making the smartest decision for your future.
Laila Azzahra is a professional writer and blogger that loves to write about technology, business, entertainment, science, and health.