Pension advice: What is a Defined Benefit Pension?

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Currently, there are three main types of pension; the State Pension; Defined Contribution Pensions Defined Benefit Pensions. Most people will be entitled to receive the State Pension, as it’s paid by the and can be built up through your working life via National Insurance contributions. The State Pension is secure income for life, which increases by at least the rate of inflation every year. But not everyone relies on the State Pension, and many have their own little pot saved up for later in life.

What is a Defined Benefit Pension?

A Defined Benefit (DB) Pension is one where the amount you are paid is based on how many years you’ve worked for your employer.

The salary you have earned is also taken into account in a DB pension.

DB pensions pay out a secure income for life, which like the State Pension, also increased every year.

You may have a DB pension if you’ve worked for a large employer or somewhere in the public sector.

Your employer contributes to the scheme and is responsible for making sure there’s enough money there to pay your pension income when you choose to retire.

But you can contribute to your DB Pension scheme as well.

When you die, the pension will usually continue being paid to your spouse, civil partner or dependents.

Your latest pension statement will give you a good idea of how much you might get in income at retirement.

If you don’t have a statement, ask your pension administrator or provider to send one through to you.

The statements usually show your pension based on:

  • Your current salary
  • How long you’ve been enrolled in the scheme
  • What your pension might be if you stay in the scheme until normal retirement age (usually 65)

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Even if you’ve left the DB pension scheme, you should still get a statement every year.

The statement should show you exactly how much your pension pot is worth.

In most cases, your pension will increase by a set amount each year up until you reach retirement age.

If your scheme allows you to take part of your pension as a Tax-Free lump sum, make sure you know whether your statement shows the amount you will get before or after taking it.

Employers will usually stop contributing to your pension and your pensions starts to be paid.

Depending on the scheme, you might even be able to take your pension from the age of 55, but can affect how much money you get overall.

It’s also possible to defer your pension, as well as taking the money without actually retiring.

Deferring may mean you get a higher income when you eventually take the time off but make sure to check your scheme first to find out the details and avoid any surprises.

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