Key Differences Between Schemes
This page will provide a brief comparison of some of the main differences between the three projections we have offered. We will look the cost to you, the value of retirement benefits, and the risk beared by yourself.
| Defined Benefit (Final Salary) | Defined Contribution (Minimum) | Defined Contribution (Higher) | |
| Cost (% of Salary Yearly) | 5-8% | 5% | 10% |
| Retirement Income | £32,200 | £13,100 | £32,600 |
| Risk | Employer | You | You |
Cost
This is the amount paid by you in each projection. Minimum defined contribution may cost the least, however this will likely lead to a retirement income below half of the other two options. The higher defined contribution scheme will cost the most, but of course leads to the highest retirement income - although very similar to the defined benefit scheme.
Private defined benefit schemes may have much lower contribution rates, depending on the terms the employer wishes to set. This can make defined benefit a very attractive scheme - although increasingly rare in the UK private sector these days.
Retirement Income
This is the projected yearly income you could receive at retirement, adjusted to be in terms on today's money. This means we have shrunk the future figures down based on our inflation assumption, to give a more straightforward view of what kind of purchasing power your money will have.
Note that the defined benefit scheme offers a guaranteed income for life, whilst both defined contribution schemes have a calculated income based on the latest lifetime annuity rates. It is important to note that these rates can increase or decrease over time, meaning you could end up with more or less than this projected figure.
Risk
This indicates which party is responsible for your retirement income. In defined benefit schemes, your retirement income is promised, and regardless of investment incomes - or inflationary pressures - the employer must pay you the promised amount in line with scheme rules.
In defined contribution schemes - however - you are responsible for deciding how your contributions are handled. Schemes will usually have a 'default' option for those who don't explicitly choose an investment option. If the chosen fund performs badly, or inflation rises unexpectedly, you will not be protected from this and hence you would bear the risk of your money losing value.