Understanding Pension Plans: State, DB, and DC Explained

The State Pension is a regular payment provided by the UK government to individuals who have reached the State Pension age. Eligibility for the State Pension depends on a person’s National Insurance Contribution (NICs) record, which is accumulated through paid or credited contributions over their working life. The State Pension Age is 66, although this is due to further increase in the coming years.

For those who reached state Pension age after April 20216 and receive the ‘new state pension’, the amount a person receives is determined primarily by the number of qualifying years of NICs up to a maximum of 35 years. The full weekly payment is around £221.20 (2025/26). People with at least 10 qualifying years receive a proportionate amount, and it is possible to make voluntary contributions to fill gaps in the NIC record to increase the pension.

The State Pension is intended to provide a basic, secure level of income, ensuring that retirees have some financial support regardless of private savings or workplace pensions. It is paid weekly or monthly and currently increases each year according to the triple lock, which raises the pension by the highest of inflation, average earnings growth, or 2.5%.

While it is possible to defer receiving the State Pension, it cannot be taken early, and there is no ‘inheritable’ element to the entitlement.

It is possible to acquire a ‘State Pension Projection’ that provides an estimate of retirement income and details on the number of years of earnings, which can be a valuable exercise when planning for retirement.

A Defined Benefit (DB) Pension

DB pensions are a type of workplace pension that provides a regular income in retirement. The income is based on an employee’s salary and length of service rather than investment performance. It is the responsibility of the scheme trustees to ensure the scheme has sufficient resources to pay current and future recipients. These schemes are sometimes called final salary or career average pensions. These terms are not mutually exclusive and allude to the different manner in which the income entitlement is calculated and where there is considerable variation.

DB schemes may receive both employee and employer contributions. The employer and trustees invest the contributions and take on the investment risk. This means DB pensions tend to be more secure than defined contribution schemes, where retirement income depends on investment returns.

The pension income from a DB scheme is generally paid as a lifetime annuity, meaning the retiree receives regular payments for life, often with the option to provide for a spouse or dependents after death. Some schemes also offer early retirement options or inflation-linked increases. Again, there is considerable variability in the exact workings here, with different ‘escalation’ rates, spousal entitlements, and other considerations.

Defined Benefit schemes often include tax-free cash, which may be a separate entitlement above the income payable or may be taken in lieu of a portion of the regular income.

DB schemes were once common in both the public and private sectors, but they have become less widespread in recent decades due to high employer costs. They remain prevalent in the public sector, where liability falls on the government and taxpayers rather than the sponsoring employer.

DB pensions typically provide retirees with a secure and dependable income, and although it can be possible to ‘transfer out’ an entitlement for most individuals, this is not advisable.

A Defined Contribution (DC) pension scheme is a type of workplace or personal pension where the retirement income depends on the amount contributed and the investment performance of those contributions. Unlike Defined Benefit schemes, DC pensions do not guarantee a specific income in retirement. Instead, the money paid into the pension – whether from the member or employer - is invested in a range of funds such as stocks, bonds, or property. The performance of these assets and the costs levied will determine the future value.

DC schemes are the most common type of workplace pension in the UK today, especially in the private sector, due to their lower financial risk for employers. They are often part of auto-enrolment programs, in which employees are automatically enrolled in a pension plan unless they opt out. Contributions usually start at a minimum percentage of salary but can be increased over time to boost retirement savings.

When a member reaches retirement age, they have flexible options for accessing their pension value. They can take a tax-free lump sum, use the value to buy an annuity for guaranteed income, or enter a drawdown arrangement, withdrawing money gradually while keeping the remainder invested.

DC pensions come in a number of forms; many workplace schemes offer a simple investment range catering for those who do not wish to engage directly with the investment allocation. Self-Invested Personal Pensions permit a wider range of investments, including Commercial Property, Gold Bullion, and even Antiques. Access to such investments is more expensive and unlikely to be necessary for the vast majority of investors.

In some cases DC schemes can be combined so as to allow more expensive assets to be acquired. Small Self-Administered Schemes (SSAS) are the most common here; these schemes are required to be set up with a ‘sponsoring employer’ and are not typically available to individuals but can provide considerable flexibility to the owners and directors of small businesses. This includes, in some cases, permitting the widest range of investable assets, as well as acquiring shares in or lending cash to the sponsoring employer.

DC pensions offer the potential for higher retirement income if investments perform well. If the assets do not perform or fall in value, then such plans can leave retirees short of their required income in retirement.

Overall

It is always worth understanding what arrangements one holds and the income they may provide in retirement. A large number of rules exist which determine how much may be added, or withdrawn, from pensions, and please contact us if you would like more information. This note is for general information purposes and not advice and should not be used as a basis for any action.