There is often confusion around the difference between a Defined Benefit and a Defined Contribution pension plan. In this article we explain how Defined Benefit and Defined Contribution pension schemes differ from one another.
Company pensions can generally be categorised as being either defined benefit or defined contribution. A defined benefit pension plan (DB) sets out the specific benefit that will be paid to a retiree. This calculation takes into account factors such as the number of years an employee has worked and their salary, which then dictates the pension and/or lump sum that will be paid on retirement.
A defined contribution pension (DC) is an accumulation of funds that makes up a person's pension pot. A person contributes a portion of their salary to a pension scheme. Ideally, although not always, their employer also contributes and these contributions are invested in a fund in order to provide retirement benefits. There is tax relief on this type of pension and the benefits at retirement will depend on a number of different factors such as the contribution levels, how the investment fund performs, plan charges and fees and the annuity rates available when you retire.
Defined Benefit scheme vs Defined Contribution scheme
The main difference between a defined benefit scheme and a defined contribution scheme is that the former promises a specific income and the latter depends on factors such as the amount you pay into the pension and the fund's investment performance.
When choosing a pension, there are numerous pension plan options available. Whether you are an employer or an employee, an investor or a novice, we have many pensions to choose from which you can see at choosing a pension. Alternatively, our Financial Planning Team can provide you with more information about Zurich's pension plans and options.