What’s the difference between a defined benefit (DB) pension and a defined contribution (DC) pension?

A defined benefit (DB) pension – sometimes called a final salary pension – pays a retirement income based on your salary and how long you have been/were an active member of your employer’s DB scheme. Defined benefit pensions are most common in the public sector and older workplace schemes. A tax-free lump sum will usually also be available. In some schemes, you will give up some of your income to pay for a lump sum.

A defined contribution pension lets you build up a pension pot that provides a retirement income based on how much you and your employer contribute and how much this contribution grows. Up to a quarter of the pot can usually be taken as a tax-free lump sum, though this would reduce the amount available for your retirement income. The value of a pension pot can go down as well as up.

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