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Defined contribution and defined benefit pensions - Pensions 101 - YouTube
Channel: PensionBee
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hello and welcome to pensions 101 a
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series designed to help you make sense
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of your pension my name is martin and
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today we're talking about the two main
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types of pensions in the uk defined
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contribution and define the benefit
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pensions
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defined contribution pensions are the
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most common type of pension in fact most
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modern workplace and personal pensions
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are defined contribution pensions
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typically you and your employer if it's
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a workplace pension make contributions
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each month
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these contributions are invested into a
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range of assets such as company shares
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property or bonds
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and the amount you receive in retirement
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depends on how much you've paid into the
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pot and how well your investments are
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performed over time the personal
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contributions you make into defined
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contribution pensions will usually
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qualify for tax relief from the
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government
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basic rate taxpayers usually get a 25
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tax top-up for example if you paid 100
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pounds into your pension you'd get an
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extra 25 pounds from the government
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meaning that a total of 125 pounds would
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be invested into your pension plot
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higher rate taxpayers can claim further
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tax relief on their pension
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contributions through self-assessment at
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retirement age one option is to use a
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defined contribution pension to buy an
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annuity which will pay you an income for
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the rest of your life for a fixed number
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of years
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alternatively you can simply draw down
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your money as you wish subject to tax
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the current retirement age for defined
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contribution pensions is 55 rising to 57
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by 2028 defined contribution pensions
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are usually held outside of your estate
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for tax purposes which means your
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beneficiaries won't have to pay
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inheritance tax when you die if you die
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before the age of 75 your defined
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contribution pension can be passed on to
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your beneficiaries tax-free if you die
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after the age of 75 your pension
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beneficiaries will have to pay income
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tax at their marginal rate pensionbee
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can combine and transfer your old
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pensions into a brand new plan that you
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can manage online
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all of our plans are defined
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contribution plans and they're managed
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by some of the world's biggest money
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managers now we're going to look at
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defined benefit pensions a defined
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benefit pension also called a final
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salary pension is a type of workplace
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pension at retirement the value of a
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defined benefit pension is based on how
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long you've worked for your employer and
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promises to pay a retirement income
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based on a percentage of your salary
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with a defined benefit pension your
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employer is responsible for making sure
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there's enough money in the scheme to
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pay you when you reach retirement if
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your employer gets into financial
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difficulty and can't make its pension
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commitments the pension protection fund
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will usually cover your pension income
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but you may receive a lower amount than
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you were promised by your employer
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defined benefit pensions are
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increasingly rare but you may have one
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if you've worked for a large company or
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a public sector organization some of
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these pensions are funded which means
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you can get a cash value for your
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pension and transfer this amount to
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another provider should you wish
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before making any decisions about a
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defined benefit pension it's important
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to understand that you will lose any
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guaranteed or special benefits promised
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by your employer if you transfer your
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savings to a different provider instead
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your pension money will be invested into
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a defined contribution plan and the
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amount it's worth on retirement will be
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based on how much you've contributed
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which includes the amount you
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transferred and how the investments have
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performed over time if you have a
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defined benefit pension that's worth
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over 30 000 pounds you'll have to
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consult an independent financial advisor
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ifa
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before moving your pension
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if you're in an unfunded public sector
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pension scheme such as an nhs pension a
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teacher pension or a civil service
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pension you won't be able to move your
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retirement savings
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that's because this type of pension uses
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a pay-as-you-go system
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this means that your employer doesn't
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set aside money for employee pensions
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instead they use contributions made by
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current employees to pay pension
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benefits to retired employees usually a
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defined benefit pension promises a
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retirement income beginning on a
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specified date with pension income
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usually increasing each year in line
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with inflation normally you can pass on
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a percentage of a defined benefit
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pension to your partner or dependents
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when you die under new pension rules you
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can take 25 percent of your pension as a
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tax-free lump sum when you reach 55 or
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57 by 2028. this is quite
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straightforward if you have a defined
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contribution pension but when it comes
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to defined benefit pensions it can be
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complicated
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if you want to take a tax free lump sum
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from a defined benefit pension at
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retirement age your pension provider
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will reduce the retirement income you're
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due to receive based on how much you've
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withdrawn
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make sure you contact your pension
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provider for more details if you're
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considering this option remember that
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pensions are an investment like all
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investments the value of your pot can go
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down as well as up over time your
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capital is at risk for more information
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on pension types visit our pensions
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explain centre thank you for watching if
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you have any questions please leave them
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in the comments below don't forget to
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like share and subscribe to our youtube
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channel see you next time
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[Music]
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