In 30 seconds
- Defined benefit: a promised yearly income based on salary and years of service. The employer carries the risk.
- Defined contribution: a pot that depends on what is paid in and how investments do. You carry the risk.
- A statement showing a pot value means DC; one showing a yearly pension means DB.
- Most people are better off leaving a DB pension where it is.
Key figures
The two kinds of private pension
| Defined benefit (DB) | Defined contribution (DC) | |
|---|---|---|
| Also called | Final salary, career average, salary-related | Money purchase, personal pension, SIPP, most workplace pensions today |
| What you get | A promised income for life, worked out from your salary and years in the scheme | A pot of money, worth whatever has been paid in plus investment growth, minus charges |
| Who carries the risk | Your employer must make sure there is enough to pay you | You: if investments do badly, your pot is smaller |
| Rises with inflation | Usually, each year, up to limits set by the scheme | Only if your investments grow, or you buy an inflation-linked annuity |
| Charges | None for you to pay directly | Fees come out of your pot |
| Usual age to take it | The scheme's normal pension age; earlier usually means a lower income | Any time from 55 (57 from April 2028) |
| When you die | Most pay a pension to a spouse, civil partner or dependant | The remaining pot can go to whoever you choose |
How a defined benefit pension is worked out
A DB pension uses an "accrual rate", a fraction of your salary for each year you were a member. MoneyHelper gives these examples:
- Final salary: £30,000 salary when you leave, an accrual rate of 1/60th and 10 years in the scheme gives £30,000 × 10 ÷ 60 = £5,000 a year.
- Career average: each year you earn 1/60th of that year's pay, so a £30,000 year adds £500 a year to your pension. The yearly amounts are added up, usually with increases for inflation.
Many public sector pensions, such as the NHS, teachers' and civil service schemes, are career average DB schemes today. Most private sector DB schemes have closed to new members.
How a defined contribution pension is worked out
There is no promise. What you and your employer pay in, plus tax relief and investment growth, minus charges, is what you have. At retirement you choose what to do with it: take cash, use drawdown, buy an annuity, or a mix.
Workplace pensions set up under auto-enrolment are almost always DC.
How to tell which one you have
- Your statement shows a pot value (for example "your fund is worth £42,300"): it is DC.
- Your statement shows a yearly pension (for example "pension at 65: £6,200 a year") based on your service: it is DB.
- Still unsure? MoneyHelper has a free pension type tool that takes about a minute per pension, and your provider can confirm.
Some people have both. A few schemes are "hybrid", with DB and DC parts.
Why the type matters for your decisions
Transferring
Moving a DC pension to another provider is usually straightforward; see should I combine my pensions? Moving out of a DB scheme means giving up a guaranteed, inflation-linked income. MoneyHelper says most people are usually better off leaving a DB pension where it is, and if it is worth more than £30,000 you must take regulated financial advice before transferring.
Planning how much you need
A DB pension already gives you an income. Take it away from your target before working out how big a DC pot you need. Our retirement income calculator has a box for it.
Inheritance tax from 2027
From 6 April 2027, unused DC pots will usually count towards your estate for inheritance tax. Pensions paid to your dependants from a DB scheme are excluded. See pensions and inheritance tax.
If the employer goes bust
DB pensions in the private sector are protected by the Pension Protection Fund, which can pay compensation if an employer becomes insolvent and the scheme can't pay. Compensation can be lower than the full pension. DC pots are your own investments, held separately from your employer.
Common questions
Is my workplace pension DB or DC?
If you joined through auto-enrolment, it is almost certainly DC. Many public sector schemes, such as the NHS and teachers' pensions, are DB.
Can I have both?
Yes. Many people have a DB pension from one job and DC pensions from others. Some schemes are hybrids.
Is a DB pension safe if my employer goes bust?
Private sector DB schemes are protected by the Pension Protection Fund, which can pay compensation, though it may be lower than the full pension.
Sources
This guide is general information, not personal financial advice. Rules can change and your situation may differ. For free, impartial help, contact MoneyHelper, or speak to a regulated financial adviser.
