What are the differences between a defined benefit scheme and a private pension?
Below is a head-to-head comparison of a typical final salary scheme against a SIPP. Basically, the difference is in functionality and control.
The DB scheme offers a guaranteed income for life, while the SIPP offers the member control over their pension money – albeit at their own risk.
|Key Function||Typical final salary/career average defined benefit scheme||Self Invested Personal Pension (SIPP)|
|Structure of retirement benefits||Pre-defined||Flexible|
|Lump sum death benefits||May offer defined lump sum benefit, such as a ‘5 year guarantee’, where initial 5 years of income is guaranteed||Pension fund value available upon death as a lump sum|
|Income death benefits||Typically offers spousal income death benefits, as a percentage of member income for the lifetime of a qualifying spouse/civil partner||Pension fund value can be withdrawn as a regular income if preferred|
|Death beneficiary||Typically limited to spouse only, a long-term lifetime financial dependent may qualify||Nominated by member, any individual or charity may be nominated, multiple nominees allowed by percentage of benefits|
|Income structure||Pre-defined structured income for the lifetime of the member||Flexible income withdrawal, which may be turned up/down and on/off as desired by member, without limits|
|Inflation protection||Scheme-specific inflation protection over lifetime income||Inflation must be considered when planning withdrawals|
|Ad-hoc withdrawals||Not available||Ad-hoc withdrawals available anytime past minimum retirement age (55)|
|Currency options||Not available||Major currencies available in certain pensions for both investment and withdrawal|
|Investment control||Investment strategy controlled by scheme trustees||Investment strategy directed by member, typically under advice|
|Investment risk||Undertaken by trustees||Undertaken by member|
|Key risk of poor scheme/investment management||Should a scheme be deemed in deficit, it may be eligible for protection under the Pension Protection Fund||Poor fund performance could mean a lower income available to the member than expected and planned for|
Is a transfer from a defined benefit scheme to a SIPP right for you?
Our pension transfer quiz takes into account important factors in your personality and attitude to money. While a pension transfer might sound attractive, is it right for you? Test yourself below, and claim your free guide to pension transfers to find out more.
Reviewing your defined benefit scheme
A defined benefit scheme is a ‘one fits all’ solution provided by an employer. The income is pre-determined and the plan likely includes death benefits to a spouse, and inflation increases. If that fits with your needs, you should keep your pension.
By reviewing your pensions well in advance of retirement, you will find out what’s best for your long-term. You will understand the most suitable option to take when it comes to a time to claim your defined benefit pension, and be able to plan other wealth around your guaranteed income backbone. If your defined benefit scheme isn’t exactly what you’re looking for in retirement, perhaps a SIPP could improve your planning.