Can you explain a defined-benefit or (final-salary) pension?

A defined-benefit or final-salary pension is paid into by both the employee and employer each month. The employee receives a guaranteed amount at retirement. Accordingly, this is normally based on earnings and years employed paid into the scheme. Should you be considering whether to transfer this pension or not, then please read the advice on defined benefit pension transfers.

What is a defined-contribution pension?

A defined-contribution pension or money-purchase scheme also involves both employee and employer paying in each month. However, the contributions are invested and at retirement the pot is used to purchase a pension income. Consequently, the amount in the pension pot depends upon the performance of the investment.

What is an annuity?

An annuity is the term used to describe transferring a defined-contribution pension into a monthly retirement income. The size of the monthly payment is based on the insurance company chosen, together with other factors such as your health and life expectancy.

Understanding pension drawdown (also known as flexi access drawdown)?

Pension drawdown can be a flexible way to draw regular amounts from your personal pension pot as and when you need it, whilst allowing your pension fund to keep growing. Notably, the percentage growth of the fund will be dependant on market performance. If your investments do well, your pension fund can carry on growing which means your retirement income will increase too. Conversely, the value of your income could go down if your investments perform poorly. For more advice and things to be aware of when drawing down on pensions.

When can I take my private pension?

In April 2015 the rules changed enabling more flexibility around attaining your private pension. These changes to pensions mean that you have much more freedom over what to do with your pension savings. Besides, you don’t need to take all your benefits at one time. You can leave your pension invested so it has the potential to continue to grow or take some or all of it, or use it provide an income. Currently the age when you can access your private pension is 55 but this is due to increase to 57 in 2028. This means that after this date those under 57 will not be able to access their private pension without incurring a tax penalty. Normally you can take 25% of your pension tax-free.

What happens to my pension when I die?

Different rules apply by the different arrangements you have. Also the age that you may die and whether you had already touched your pension or not. Most defined-benefit pensions pay a pension to a surviving spouse, but not to any other dependants. Annuities on the other hand, normally stop when you die. You may be able to pass on a defined-contribution pension scheme to your dependants.

Help with any of the above Frequently Asked Questions

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