DC vs DB pension plans – does your plan impact how you can take your money?

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There are two types of pension plan: defined contribution plans and defined benefit plans. But what are the differences between them? And does the type you have affect how you can take your money? We’ve got some answers for you right here.

What is a defined contribution plan?

Defined contribution (DC) – or ‘money purchase’ – pension plans are the most common type of plan nowadays. All personal pension plans and most workplace ones are DC plans.

A DC plan is something you pay into. Your employer usually will too if you’ve got the plan through your job. You can get tax benefits on the payments you make, often in the form of tax relief. 

Money that’s been paid into your plan is invested. So the amount you end up with depends on how much has been paid in and how well your investments have performed.

Remember, the value of investments can go down as well as up and you could get back less than was paid in.

What is a defined benefit plan?

You can only ever get a defined benefit (DB) pension plan through an employer – you can’t set one up yourself. 

Some DB plans are known as ‘final salary’ plans. The amount of money you get back from these is calculated using the salary you’re on at the time you retire or leave the pension scheme. If you plan to reduce your hours before retiring, it’s worth checking with your employer or scheme trustees to find out how this might affect your plan. 

Others are ‘career average’ plans. With these, the amount you get back will be calculated using your average salary in the period you’ve belonged to the pension scheme.

If you have a DB plan, your employer will pay into it. You may be asked to as well, and you can get tax relief on your payments into your plan. 

Your employer is responsible for making sure you’ll have enough in your plan to pay you a pension income for life once you reach a specific age.

Does the type of plan I have affect how I can take my money?

Yes, your options for taking your money will be different depending on whether you have a DC or DB plan. 

How can I take my money from a DC plan?

With a DC plan, you could:

• Take a flexible income (drawdown) – You can make regular withdrawals from your plan. You choose the amount you want to receive. You can start, stop and change the payments that are made to you whenever you want.
• Take lump sums – You could take your whole pot in a oner. Or you could take lots of smaller lump sums. You decide how much you want to take from your pot and when you take it.
• Buy a guaranteed income for life (annuity) – You can use some or all of the money in your plan to buy a guaranteed income that’ll be paid to you for as long as you live. You could even buy an annuity that provides for your family members after you die. 

You could potentially choose a combination of these options.

25% of your plan’s value is normally tax-free. You could take this as one single lump sum, or you might be able to take it in stages.

With DC plans, you can usually start taking your money from the age of 55 (rising to 57 from 6 April 2028).

How can I take my money from a DB plan?

With a DB plan, you won’t get to choose drawdown or take lump sums as and when you please. Instead, you’ll be paid an income for the rest of your life – usually on a monthly basis. And the amount will normally go up in line with inflation.

When you die, your spouse or dependents will normally start to receive an income from your plan.

You may be entitled to take a tax-free lump sum, but doing this could reduce the total amount of money you get from your plan.

And you might be able to take your entire plan as a single lump sum. This is called a ‘trivial commutation lump sum’, and you can only take it under specific circumstances. For example, the total value across every single one of your pension plans would have to be less than £30,000. 

You may still be entitled to take some of your money tax-free if you take your DB plan as a lump sum. You can find out more about taking a trivial commutation lump sum on MoneyHelper.

With DB plans, the age at which you can take your money may be set by your pension scheme, so do check. You might need to wait until 65, for example. You may be able to take your money at age 55, but this could reduce the amount of money you get from your plan.

Does the type of plan I have affect how my money is taxed?

We mentioned that you can normally take 25% of a DC plan’s value tax-free. And you may be able to take some money tax-free from a DB plan. But what about anything over your tax-free entitlement?

Whether you’ve got a DB or DC plan, anything over your tax-free entitlement will be taxed according to your tax band. So if you’re a basic-rate taxpayer and you pay tax at a rate of 20%, this is how much you’ll be taxed on the money you take from your plan. 

If you have a DC plan, you might find that you end up overpaying tax – especially if you’re not taking the same amount from your plan each month. You can find out more in our article. 

What’s the conclusion?

DC plans can give you more flexibility when it comes to how you take your money. But a DB plan comes with benefits and guarantees you don’t get with a DC plan. Overall, these plans might be different, but they have one big thing in common: they’re both a way to help you fund your life after work. 

If you’re considering transferring money from a DB into a DC plan, it’s worth getting financial advice, as it’s a huge decision. If you're considering transferring and your DB plan is over £30,000, you need to get financial advice by law. If you don’t have a financial adviser, you can find one at Unbiased. You can check if an adviser has been authorised by the Financial Conduct Authority (FCA) on FCA.org.uk. 

If you have a DC plan with Standard Life and you’d like to check in on how your pension savings are doing, you can do this online or on our app. You can find out more about our online services on our website, or visit our support page for FAQs and ways to get in touch.

The information here is based on our understanding in August 2023 and shouldn’t be taken as financial advice. 

Standard Life accepts no responsibility for information in external websites. These are provided for general information.

A pension is an investment and its value can go down as well as up and may be worth less than was paid in.

Your own personal circumstances, including where you live in the UK, will have an impact on the tax you pay. Laws and tax rules may change in the future.