Which pension?

[44Seahorses]

Hoping for some help with understanding my pension options as I've realised I have no idea how they work

Is a defined benefit scheme always the better bet? I have the choice of two pensions through work - a defined contribution scheme where I pay 5%, employer pays 3%, or a defined benefit scheme where I pay 6% with pension calculated as 1/60 pensionable pay.

I also have a small amount of pension from my previous job that I can either take back as cash or transfer. How would this work if I enter the defined benefit scheme?

Thanks

I am sure someone knowledgeable be will be along soon, but as some starting points.
"Better" has different measures, defined benefit is usually the most risk adverse option, but defined contribution may have the potential of higher returns. Defined benefit is simpler, no concerns about managing funds in the future or a deciding on a drawdown strategy.

Things to consider are;

• how old are you ( due to compound interest on defined contribution I think defined benefit is even better value later in life)
• how is the defined contribution managed? Do you have a choice of funds? Any fees
• what other pensions do you have?
• who backs the defined benefit pension? This should be regulated now so safer than the olden days when many holders of private defined benefit pensions ended up out of pocket.
• is the defined benefit pension index linked? Ie benefit increases with inflation.

My gut is 1/60 is a generous defined benefit accrual, whereas 8% is minimal defined contribution so in this instance the defined benefit will be better.

Not a pension actuary here, but I do have several bits of pension, both DB and DC.
I would recommend the DB here 100%.

6% for 1/60th accrual rate is awesome.

I’d take that in a flash. I pay almost 10% pa for 1/75 accrual.

DB sometimes also comes with other insurance benefits and income for your spouse if they outlive you. You’d need to check if that is true of your DB pension.

DC does allow you to access the fund from 55… but there is also the possibility of it running out because you’ve spent it all. DB will never run out.

In general, (and apologies for being blunt), DB is better if you have a long retirement, DC if you don’t.

Defined benefit is always better. They are wonderful.

I suggest you check if the defined benefit pension scheme is fully funded or if there is a deficit.

6% for a 1/60th accrual sounds great.
You’re unlikely to do better with a DC scheme, but you haven’t posted enough detail for anyone to really say.

A defined benefit schemes actually gives you a guarantee of what you will get on retirement - it's not dependent on the ups and downs of the stock market (like a defined contribution scheme). They are essentially gold plated pensions and will last you for life and never run dry. They often have other benefits attached, like life insurance or ill health cover if you are permanently unable to work.

One possible option to consider - Opt in to your employers defined benefit scheme as your main pension - you'd be mad not to.
If/when you can afford it, take out a small additional personal pension yourself - one with low fees, flexible contributions that you can start or stop as your circumstances change. You could use this as a backup to support and add flexibilty to your main pension (to retire a little earlier for instance, or to top up your main pension payout until your state pension kicks in).

(This is not financial advice - I'm speaking from my own experience and I'm not a qualified financial advisor).

@Focalpoint

I suggest you check if the defined benefit pension scheme is fully funded or if there is a deficit.

Why's this?

Just to add to @Beenaboutabit

In general, (and apologies for being blunt), DB is better if you have a long retirement, DC if you don’t.

Even if you have a short retirement, if you have a spouse they will get usually a % of your pension. So if they have a long retirement after you then it could still be better than a DC. There may also be a pension payable to dependent children.