DB v DC Pension Schemes

DB schemes and DC schemes are the two most common types of pension scheme in the UK, and while they share many similarities, they also have several notable differences. The main area which sets these two pension plans apart is the way that your pension is calculated:

In DB schemes, your pension pot is based on your salary and for how long you have paid in.
In DC schemes, your pension pot is based on how much is paid in and how well your investments perform.

DB Schemes

If you are paying into the North East Scotland Pension Fund (NESPF), you are paying into a DB scheme. DB schemes are usually seen to be the more desirable and less risky option, with an income guaranteed for life and underwritten by law. In a DB scheme, the amount of contributions you have made are not taken into account when it comes to your end payment, rather your contributions accumulate to form an annual income. So instead of having a pot of money at retirement, what your contributions have built up is an annual amount that is paid to you every year in retirement. This increases with the cost of living, so that as prices rise, so too does your pension. Plus depending on when you were paying in, you may have an automatic tax free lump sum as part of your pension benefits.

DB schemes are becoming less common due to the high running costs for employers, and are mostly offered through public sector workplaces. DB schemes do not require a high level of involvement from the member; other than paying monthly contributions, most decisions are taken by the scheme, including where contributions are invested.

Depending on when you joined the DB scheme, you may have a final salary or career average pension (CARE). These are different ways of working out your pension, and what you will have will depend on the rules in place at the time you were paying into the pension scheme. In a nutshell, final salary pensions are based on your salary and length of membership at retirement, whereas career average pensions are based on your salary over your entire membership. Depending on your dates of employment, you may find that you have both a final salary and CARE pension which will make up your pension pot. More information on CARE and final salary pensions can be found here.

DC Schemes

DC schemes are much more common than DB schemes and are often known as ‘money purchase’ pension schemes. These can take the form of either workplace pensions or private pensions, and members and employees will both pay in. For workplace pensions, DC schemes operate much like a savings account, where the individual and their employer pay straight into the account. The money paid in, is then invested in stocks, shares and bonds with the aim of increasing the overall amount in the account. At the end of your working life, you would have a pot of money which you would use to fund your retirement.

As the money is invested, the value of your pension can go up, or down, depending on the performance of investments and the wider economy. In DC schemes, you would also have to make decisions as to where to invest your money, often from a shortlist of funds and stocks.

While DB schemes are seen to be the more attractive option of the two, due to the promise of a guaranteed income, DC schemes may offer more options in terms of when and how you can withdraw your savings. DC schemes also offer members more autonomy over their investments.

Regardless of the pros and cons of each option, both schemes are beneficial in the sense that they are helping savers pave the way towards a better retirement. By paying into a pension, you are taking steps towards a more secure financial future.

If you have any queries about your NESPF pension, you can contact the fund here. While we cannot give financial advice, we can assist with any questions you have about your NESPF pension. As with all financial matters, if you need professional advice, you can speak with a regulated independent financial advisor who may be able to offer impartial guidance.