How to compare defined benefit and defined contribution pensions when changing jobs?

[FishMouse]

I'm considering applying for a new job, a step up with a small increase in pay after tax, a week's extra annual leave and cheaper parking. However, my current job has a defined benefit pension and the new job has a defined contribution pension. How can I compare the two?
Employer contribution rate is 18% of salary and I pay 8.5% for the DB in my current job. The new job max employer contribution is 10%, if I pay 6% or more of salary, for the DC scheme.
Obviously the employer contribution is less, I've worked out in cash terms it pretty much cancels out the pay rise, which I'm ok with, as I won't be worse off, and my contribution rate will be lower.
But is my current employer contribution into the DB scheme worth more than the cash value, as it's into a DB scheme not a DC? And how do I quantify it?
I really need my pension as my mortgage runs into retirement. I just don't want to be too risk averse. I'm 51.

DB schemes are much better imo, and there is a reason why both you and your employer are paying so much more in.

I swapped the other way to you and found the Martin Lewis forums to be really helpful

You just need to run the numbers - what is your estimated annual income from the DB scheme vs what would it be if you made the contributions to the DC scheme for the next x years? There are various calculators online. But yes, usually DB is better.

I don't mind if the end result is a bit lower, as the new job will unlock other better jobs in theory at least. I just don't want it to be massively lower.
I'll run the numbers to the estimated incomes for both, thanks. Is there a calculator you could recommend?
I'm not sure what the new scheme would invest in or which provider it's with, would that make a difference with charges etc?

I think the issue is that there are no guarantees about what you will get back from a DC scheme as it depends on three extent to which the value of the fund increases over time, and that is inherently unpredictable. Whereas DB is fixed. So the calculators will help but only in so far as they will give you an estimate on the basis of current predictions.

If the new job offers better prospects, then it may well be worth taking anyway. I moved from a DB scheme to a DC scheme and don't regret it, but I'm bloody glad that I still have a good few years of the DB scheme under my belt!!

@FishMouse just put it into chat gpt and ask it to model on poor/moderate/good performance and that will give you a range, assuming that your contributions remain the same over the next x years.

It's hard to directly compare because they are so different, especially in retirement with guaranteed annual increases and dependents benefits.

But as a rough fag packet thoughts I would:

Work out how much would be going in to your DC pension per year. X the number of years you anticipate being in the scheme. Let's say the total amount is around £150k (60k x 16% x 16 yrs)

Do you know your accrual rate in your DB pension? So do you know how much (roughly ) you add each year? You might, each year for example add £500 per year to the pension you can claim at 67. So over the next 16 years you might be adding £8000 to the annual pension you would receive from your DB scheme.

Would you prefer an extra £8k py for life or a £150k pot to draw on when you wish? (Obvs substitute for your actual numbers!!).

This is completely rough but it is how I would think about it.

A combination of DB and DC pensions is actually quite a desirable situation, DB to pay the bills and DC to draw on for cars, holidays, home improvements etc.

The eternal problem with defined contribution schemes is that were there to be a global crash of the markets just before you take your benefits you might be looking at a fund which has halved or worse. It is recommended that you move your investments to a more secure set of funds in the 5 years before you retire therefore, but this doesn't help you if there have been crashes before. Anyway you may not have control of the funds at all so it's all in the lap of the Gods. Defined benefit schemes are much more secure obviously.

The 18% your employer pays to the DB is a rate that averages the cost across different ages - the rate for a 51 year old (let’s say you were the last member of the scheme) to provide the same benefit will be much higher, as the money doesn’t have the same time to grow before you receive the guaranteed income.

I’m late 40s and a few years ago looked at a civil service job that would have involved a 40k pay cut, I worked out the civil service DB scheme would just about make up for it financially, due to my age - ie the value of the DB benefit I would accrue was worth c £40k in pension contributions terms.

A “small” increase in pay presumably doesn’t even offset the known drop in the employer contribution rate from (average) 18% to (fixed) 10%.

Unless the future job prospects are stellar then financially (at least in retirement) you’d likely be better where you are.

You’d need to carefully look into the funds and charges yourself. They can make a huge difference to the ultimate value of a DC pot.

Apart from the main obvious benefit of DB - certainty of what you’ll get in retirement, probably index-linked - the other massive factor is that managing your own pension can be a significant amount of work and stress. I’ve just retired and set up an index linked annuity with part of my pot - quite a small amount of income for quite a lot of capital. It was quite a pain to get set up and it’s hard to know if you’ve done the right thing.

All very helpful advice, thank you.
I have a good idea of where to start with comparing them now. Though it is a bit apples and oranges.
The flexibility and potentially managing the DC pension myself at retirement does appeal, or at least doesn't put me off, given the issues reported with Capita and the civil service pension scheme recently. The uncertainty is a downside.
I feel it wouldn't be massively stupid to switch though, if it comes to it, on the figures I've done. Which was what I was concerned about.

Remember you'll also have to make assumptions about how much your DC pension will grow over the years. A savings calculator (like the MSE one) can then help you see what the final sum in there might be. I would suggest using real terms figures (so assume a growth rate net of inflation).

To then compare that sum with the value of a right to a (presumably index-linked) payment for life, you can use an annuity calculator.

But even with all this, it's still hard to compare what the value will be to you as there are so many other factors. For example, if you take early retirement your DB payment will be reduced, but by how much depends on the scheme. Ditto taking a tax free lump sum. There can be benefits in having some money within a DC scheme to allow you greater flexibility (eg to retire early using the DC pension and leave the DB pension untouched until the age at which it ordinarily pays out). And how valuable it is to you personally that you can pass on unspent DC pension (whereas DB usually means a substantially reduced spousal payment and nothing at all for descendants) will obviously vary depending on whether you have a spouse and children and what their circumstances are.

Good point, I didn't consider the inheritance of the DC pot aspect of this. DB scheme will give a widower's pension, but no pot to pass on. I'm not married right now but probably will be by the time I retire, I have kids who are nearly grown up. A lot of moving parts here. I feel a lot better informed now.

How many years have you been in the DB pension?

I have 2 DB pensions from earlier in my career, but even though I haven’t contributed to them for many years, they grow by a guaranteed rate related to inflation (govt sets a rate at which frozen DB pensions must increase each year, CS pension might be even better!), so I will get a reasonable pension relative to how many years I paid in and my salary when leaving.

It’s worth finding out how much your DB pension is worth now, and maybe project the figure forward until your pension age. Could you live on the figure plus state pension, and have the DC pension as extra, as others have said?

I have taken early retirement, living off a DC pension, and ISA savings. Once I get both DB pensions (at 65) then state at 67, I will only need to use my DC pot for extras, eg holidays, maybe new cars.

govt sets a rate at which frozen DB pensions must increase each year

This might be true for public sector but not for private (mostly legacy) DB schemes which are all governed by their own individual scheme rules.

I can’t find the actual legislation, but there is somewhere a govt table that is used, certainly by my private DB pensions, maybe not all, someone else in the know might be able to advise.

I have, in the past, read the table and how it applies, I can't remember exactly where to look.

I think scheme rules are used once my pensions are in payment, but govt figures prior to that.

Found it, it is called Statutory revaluation.

“Statutory revaluation is the legal requirement in the UK to increase deferred benefits in defined benefit (final salary) pension schemes to keep pace with inflation. It applies to pension rights accrued from January 1, 1986, for members who left service before retirement, ensuring their pension value is not significantly reduced.”

“The statutory requirement to increase defined benefit pensions depends on whether the pension is in payment. Indexation applies to pensions in payment, while revaluation applies to deferred pensions. Deferred pensions are those where someone is no longer accruing (building up) their pension but has not yet drawn a payment. For example, where they have left employment but not yet retired.“

above two taken from house of commons library,

and

“Prior to 6 April 2009, statutory revaluation was calculated by reference to the annual percentage increase in RPI, capped at 5% per annum. In respect of service on and from that date the statutory cap has reduced to 2.5%. From April 2011 the Government switched the index used to calculate statutory pension increases from RPI to CPI.”

Thank you, that's very helpful.

It’s hard to compare DB and DC schemes, but in general DC schemes are significantly worse than DB schemes.

Theres a good NHS pensions FB page, and I always remember the woman that runs that saying you’d have to put ~60% of your pension into a DC scheme to even begin to equate to a DB scheme.

DB is better - you know what you will get. In DC schemes you don’t know what you will get

I'd kill for a DB pension. I earn a 6 figure salary and have been contributing to my DC pot for nearly 20 years. Even with better than average employer contributions and extra contributions from me, im on track for a pension similar to that of a senior nurse earning a 3rd of my wage. And that's if the stock markets don't screw me.

This is so true. Db schemes are worth SO much.

CS pensions go up by whatever percentage state benefits are increased by every year, I got ill health retirement & my pension has nearly trebled in the 14 years I have been receiving it.

I have 24 years in DB schemes. 2 civil service schemes and 1 local authority. Altogether, if I don't put anything else in them, they are worth about 22k a year. If I stay in my current pension scheme until pension age, it will increase by 19k a year.
I've done some annuity calculations based on a 250k pension pot from the theoretical DC pension until pension age, and this has given me annual annuity income of between 7k and 18k depending on which calculator I use. I would be putting less into that though, compared to my DB scheme, but it is still potentially much less pension and not guaranteed like the DB one.
I can't see my bills going down by much when I'm retired as I'll still have a mortgage if I don't manage to overpay it and I'll still need to run a car, heat the house etc.

How much will you owe on your mortgage when you take your DB pensions, and how much lump sum would you get based on your estimate of 22k pensions? Whoever manages the DB pensions should be able to give you some estimates.

Would the lump sum(s) be enough to pay off your mortgage?