Lesson 1 of 7
Defined benefit vs defined contribution: the two pension worlds
One promises a specific income for life. The other is a pot you invest yourself. Most people have the second.
Lesson video
The fundamental difference
A defined benefit (DB) pension, sometimes called a final salary pension, promises a specific annual income in retirement calculated from your salary and years of service. The employer bears the investment risk. If the market crashes, your pension stays the same.
A defined contribution (DC) pension is a pot of money that you (and usually your employer) contribute to. You choose how it is invested. The final value depends entirely on how much goes in and how the investments perform. You bear the investment risk.
DB pensions are almost extinct in the private sector. If you started working after 2010, you almost certainly have a DC pension.
DB vs DC at a glance
| Feature | Defined Benefit (DB) | Defined Contribution (DC) |
|---|---|---|
| Income in retirement | Guaranteed formula (e.g. 1/60th of final salary per year of service) | Depends on pot size and how you draw it |
| Investment risk | Employer bears it | You bear it |
| Portability | Stays with the scheme (transferable but complex) | Moves with you easily |
| Still common? | Public sector (NHS, teachers, civil service) | Almost all private sector jobs |
| Typical employer contribution | 15-25% of salary | 3-10% of salary |
| Tax treatment | Same (tax relief on contributions, income taxed on withdrawal) | Same |
If you have a DB pension
Knowledge check
You worked for 20 years at a company with a 1/60th final salary DB pension. Your final salary was £45,000. What is your guaranteed annual pension?
“I ran the numbers and realised how much money I was leaving on the table. Sold the car, saved up cash, and got rid of the payment.”
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Common questions about defined benefit vs defined contribution:
Getting started with defined benefit vs defined contribu
Understand your current position
Use the calculator on the homepage to see your take-home pay and tax position before making changes.
Take the first small step
You do not need to do everything at once. Pick the single action from this lesson that has the highest impact and do it this week.
Review after one month
Check the effect on your payslip or bank statement. Adjust if needed. Progress, not perfection.
Use the Wealthy Employee calculator to see how defined benefit vs defined contribution: affects your specific take-home pay and tax position.
Knowledge check
Based on what you learned about defined benefit vs defined contribu, which statement is most accurate?