Planning for retirement can feel overwhelming, but understanding the type of pension you have is a great place to start. In the UK, there are two main types of pensions: Defined Benefit (DB) and Defined Contribution (DC). Each works in a different way, and knowing the difference can help you feel more confident about your financial future.
Defined Contribution Pensions
These are now the most common type of pension. With a DC pension, the amount you’ll have in retirement depends on:
How much you and your employer pay in
How your investments perform over time
How you choose to take your money when you retire
Your pension provider invests your contributions (for example, in shares or bonds). The value of your pot can rise or fall depending on how those investments perform. Some schemes automatically move your money into lower-risk investments as you get close to retirement – this is called lifestyling. It’s worth checking with your provider or adviser to see if this applies to you.
Taking Your Pension
When the time comes, you’ll have choices:
- Take smaller amounts over time
·Convert some or all of it into an annuity (a guaranteed income for life)
Most people can take up to 25% of their pot tax-free, up to a maximum of £268,275. The rest is taxed as income when you withdraw it.
A DC pension doesn’t guarantee an income. It depends on contributions, investment performance, and your withdrawal choices.
Defined Benefit Pensions
Sometimes called final salary or career average pensions, these are usually workplace schemes. They’re less common now, but they still provide strong security for those who have them.
What You’ll Get
Unlike a DC pension, the income from a DB pension doesn’t depend on investments. Instead, it’s based on your scheme’s rules – usually linked to your salary and the number of years you’ve worked for your employer.
Your pension provider promises to pay you a set income each year from retirement. You may also be able to take up to 25% as a tax-free lump sum (again capped at £268,275).
The earliest you can normally access your pension is age 55, though this depends on the scheme’s rules. DB pensions are most common in the public sector but some private sector employers still offer them.
What About Tax?
The type of pension you have doesn’t change the way you’re taxed – income from pensions is generally taxed in the same way as earnings. Most pensions allow you to take 25% of your total as tax-free cash.
For DB pensions, taking a tax-free lump sum usually means your future annual income will be adjusted down to reflect that withdrawal.
One final point: if you pass away, death benefits from DC pensions are usually tax-free if you’re under 75. With DB pensions, income paid to dependants is normally taxable.
Which Pension is Right for You?
Many people will have more than one type of pension over their working life. What matters most is understanding how yours works and how it fits into your bigger financial plan.
If your goal is early retirement, family adventures, or financial freedom, making smart choices with your pension today can give you confidence for tomorrow.
We’re here to help you cut through the jargon and take control of your future. Whether you want clarity on your pension, a tailored retirement strategy, or ways to make your money work harder, our role is simple: to make financial planning straightforward and stress-free.
