Choice of Pension in new job - Defined Benefit or Defined Contribution?

[GentlyGentlyOhDear]

I am leaving one public sector employer where I have an LGPS defined benefit pension. I'm moving to another public sector organisation where I have the option of choosing between a defined benefit and defined contribution scheme. Just wondering if one would generally be seen as better than the other?

DB is Career average, 6.5% personal contribution, linked to state retirement age
DC is 5% personal and 10% employer contribution, can be taken at any time

As far as I am aware, they are different providers so I can't continue my current LGPS DB scheme, but I will double check that.

Other potentially relevant info - I am part-time 3 days a week and will potentially go to full time in the next two or three years, not sure if it will be with the same employer, but would more than likely be another public sector one with similar pension options. I also do consultancy work on the side, which I don't have a pension for.

Any comments to weigh up options would be very welcome!

Generally defined benefits are better, giving you assurance of what you'll have when you retire rather than it being in the hands of the markets and investments.

I was probably veering more towards that one.
I just wondered if it would be better/easier with the DC one if I were going to increase my contributions to say 10%, whereas it doesn't seem to work out as beneficial doing additional contributions with the DB one. When I've looked at it previously, buying extra years didn't seem cost-effective.

I think most people would say that any access to a DB scheme should be seized promptly with both hands; they're becoming as rare as hen's teeth. In the public sector most schemes, unless you have reserved rights based on age etc, are tied to State Pension Age. You may be able to take it sooner but the amount payable will be subject to an actuarial reduction based on it being paid for longer.

Stepping into territory where advice might be needed but can you put more into a DC scheme over and above your DB contributions.

As you have a DB pension one thing to consider is that the earlier you choose to access it, the more it gets reduced in value. So whilst contributing to another DB pension could produce higher returns another consideration could be to build up the DC pension and then burn through that once you decide to retire and bridge the gap until you reach the full DB access age knowing it won't be reduced (and then after that you'd have state pension following too).

No one answer is correct it's more about how much you think you want to live on and at what age you think you'd like to start living that lifestyle

DB are usually better than DC. DB also usually come with inflation protection- so you get an increase every year usually linked to CPI inflation index. DC are never inflation protected unless you use the DC to purchase an annuity with inflation protection.

You also missed another bit though as DB are usually career average times a % times years of service. I don’t think any DB pensions exist that actually pay 100% of your average salary over your career! So you need to factor in how long you will be working in this job as that will affect your projected pension amount.

DB also usually have a disability provision where you can claim it earlier than state pension age if you’ve been permanently disabled.

When I retire I should have two pensions, assuming nothing changes in the mean time. The first half of my career earnings are in a defined benefit scheme, the second half will be in a defined contribution scheme. The DB scheme is hands down the better pension. This is the main reason so many of us were unhappy to be TUPEd to a new employer, it has completely moved the goal posts and means we're all likely to be working for longer.

Go for the DB scheme.

Similar to PP I spent first half of my career in a DB scheme (joined the company literally weeks before it ended in 2001!) and am now at the point where I've accrued the same years of service in company 2. DB scheme will pay me £9k a year salary (in todays money) which I think would equate to a valuation of around £270k.
I have accrued £130k to date in current role and that's with me putting in at least 10% a year. I'm now ramping that up a lot but you can see the difference there. That said it's nice to have the flexibility of the DC scheme and I'll be using the tax free sum when I'm 57 to repay the mortgage.

These are all very helpful comments thank you!
@wobytide that's an interesting point about having both and accessing the DC earlier
@Bromptotoo you've confirmed what I thought about the DB being the best!
@Heatherbell1978 and @Coolblur thanks so much for the comparison notes. I was thinking of putting 10-15% myself into the DC, so it's useful to see that even high contributions myself wouldn't 'beat' the DB value (in all likelihood, obviously not extrapolating too much from your situation)
@L3ThirtySeven yes, it is CPI linked for inflation. Didn't occur to me to consider that doesn't happen for DC. And yes useful about the ill health and disability too.

Thanks all. I'm only allowed to join the DB one in the first year of working there, and the DC one at any point, which also suggests the DB one is better!!!

If you are thinking you might like to retire or start claiming a pension a bit earlier could you do DB and also contribute to a SIPP?

That way you would also have a pension you could start accessing before state retirement age should you wish without needing to reduce the value of your DB pension.

Thats if you can’t have both

Do you know what the accrual rate is for the DB scheme? I would say that is a critical factor in any decision making.

I also have both DB and DC pensions from different parts of my career. No one has a crystal ball to know how the DC will perform vs the DB, but I like knowing that with the DB element if I live to 110 I will never run out of money as I will have my DB pension which with state pension is enough to cover the basic bills.

There’s nothing to stop you if and when you can afford it opening a SIPP as well so you in effect have a DC pension too that you can access before the DB pension to tide you over if you want to retire earlier than state pension age (although be aware at the moment you can access your SIPP 10 years earlier than the state pension age, rules can change). The other option is to save into ISAs as well.

DB would be my choice. I’d set up a SIPP as well though for potential early retirement and a lump sum. 6.5% contributions is lower than the 10% I had for my DB pension so there’s perhaps some scope for regular contributions to a SIPP.

Definitely the DB. You can always save into a Sipp or ISA on the side- which makes more sense will depend on our circumstances.

Yes, definitely DB, absolutely 100%. DB scheme basically gives you a guaranteed income, linked to inflation, for the rest of your life.
DC just gets you a pot of money which will grow/shrink depending on how the stock market performs (so could lose significant % of it's value right at the point when you retire) and you have to decide how to use that pot in the best way to suit you.

I used to work in pensions and this is excellent advice. DB plans mean that the employer takes on ALL the risk - investment return before/after retirement AND longevity (i.e. the financial risk of living a long time). DC means all those risks are on you.

You may also be able to make additional payments into the DB schemes now which allow you to retire earlier without reduction.

I would take advice op. You won’t definitely be better off in a DB scheme even though it feels like you will. Check the accrual
rate and then you can compare different pension outcomes at moneyheper.org.uk
by putting various assumptions in and it works out what might be better value for you. I really think it is worth properly investigating and not just assuming DB is best. But you need your accrual rate for the DB scheme.

Thanks so much everyone.
I haven't heard of moneyheper.org.uk @Thethingswedoforlove - thanks for mentioning that.

I've emailed the employer to ask the accrual rate as it wasn't on the initial leaflet.

We do have Vanguard stocks and shares ISAs which we are saving into for retirement/paying mortgage off/helping out kids, but I will also look into a SIPP as they aren't something I know much about - so thank you to everyone who mentioned those too.

I've found out the DB isn't the same provider as my current DB pension, so I'm waiting for more details to be able to fully compare.

DB scheme without doubt.

Just found out that the accrual rate for the DB is 1/80th per year.
My current one is 1/49th, so it's a bit of a drop in contribution!

@GentlyGentlyOhDear its moneyhelper.org.U.K. There was a typo in my initial post. Sorry. I strongly suggest you do it as that accrual rate is not that high. Assumptions re DB schemes tend to be based on older schemes with higher accrual rates.

Hi @Thethingswedoforlove , I realised it must have been that when I was googling to find the site! Ill definitely compare options, Thanks!

@GentlyGentlyOhDear double check if the new DB scheme has a lump sum as well. That may account for the difference.

@wobytide is right about taking pension early but remember you get the lower pension for longer so in overall terms the amount you get is roughly similar.

Do not underestimate the benefit of DB pensions being linked to CPI. My DB pension went up by 10.1% this year.

You can’t just compare accrual rates though - you need to know what’s being accrued.

The LGPS is career average which means whatever you earn in a year you get 1/49th of that in your pension account.

I know 1/80th looks low compared to 1/49th, but if it’s 1/80th of your final salary when you retire that could be much better than 1/49th of career average salary (depends on your pay progression - final salary schemes tend to be better for those with significant pay progression whereas career average tends to be better for those whose pay just ticks along although obviously it’s never that black and white!)

Also check life insurance - DB schemes often have death in service benefits such as a lump sum multiple of pay and pensions for dependents. With the DC scheme your dependents would just get your pot paid out. Something else to think about.