Do you have a defined benefit (DB) pension? Maybe you’re considering getting a job in the public sector, where defined benefit pension schemes are more common, but you’re not too sure what they involve. In short, such a scheme offers a payout depending on your final salary, as well as your years of employment. In contrast, defined contribution (DC) pensions offer a payout depending on how much you and your employer pay in, and how well it performs in financial markets.
If you’re comparing possible pensions, here’s what a defined benefit setup offers you.
Inflation protection
Perhaps the greatest advantage of a DB pension is that you’re protected against inflation. In other words, your income increases annually to match rising living costs and ensure you maintain your standard of living.
This is far more beneficial than the alternative presented by regular pensions, where your purchasing power will decrease year after year as inflation and living costs continue to increase.
Guaranteed income for life
Defined benefit pensions also offer greater financial security than alternative options, as they provide a fixed stream of income for the rest of your life. With this knowledge, you don’t need to worry about having enough savings to support your retirement, since you’ll keep receiving payouts no matter how long you live.
Typically, you gain access to your defined benefit pension when you reach state pension age. While some schemes may let you take it earlier, this can also impact how much you receive.
No investment decisions
While some regular pensions typically put you in control of investment choices, defined benefit pensions instead place that burden upon a board of trustees. This is the perfect solution for those who have little knowledge about investment, and can remove any stress about accidentally making a poor financial decision that will impact your future income.
Protection for dependents
Another perk of choosing a defined benefit pension is that they often include survivor benefits. In other words, a portion of your pension will continue to be paid towards your spouse or other dependents, keeping your family protected after you pass.
This can provide peace of mind to those concerned about how best to take care of their families.
Conclusion
In short, defined benefits pension schemes can provide a range of advantages over more traditional pension plans. This makes them perfect for those looking for a consistent standard of living throughout their retirement, especially if you lack investment expertise. Though they are now very rare in the private sector, they remain a common upside of work in the public sector, so you might wish to make that a consideration when exploring potential employment opportunities.
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