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Defined benefit pension scheme

 

Defined benefit, (DB) pension schemes, are considered the best pensions available, and are often referred to as “gold plated” pension schemes.

They can be non-contributory (meaning you don’t have to pay anything in at all), or they can be contributory, with varying levels of employee and employer contributions. These contributions will most likely be far more than the minimums noted above in the Auto-enrolment pension section.

Defined benefit pensions differ from most of the other pensions, in so far as you are paying and contributing for a pensions “promise”, from your employer of a certain income, as opposed to trying to build as large a cash “pot” as possible, to provide a return for your pension income.

This “promise”, could be based on something like a proportion of your career average salary, or your salary at retirement, often capped at two thirds or a half.

The calculation of how much you are eventually due at retirement will also depend on the length of service you have completed, in years and months.

Defined benefit schemes have been closing to new members and existing members for many years now, due to the high cost of running them. They are being replaced with the cheaper option of, defined contribution schemes, or money purchase schemes.

TIP: If you are ever offered a defined benefit pension scheme, grab it with both hands and sign up immediately, especially if it is non-contributory.