When you work in the public and government service, it is most likely that you are registered to a Defined Benefit (DB) pension. DB pension is an investment pot for employees where they can receive a fixed yearly income when they are retired. The amount they receive will be made depending on the final salary they receive or the average of their wage. Although this regulation sounds appealing, many pension transfer specialist recommend employees/investors to switch their pension plan to a Defined Contribution (DC). This program is frequently used by workers for many reasons. However, if you are thinking about switching to this option, you should have a better understanding of it, so that you can take careful consideration. It is important to identify the benefits and drawbacks of each choice, so you can ensure that you will make the best decision. This article will help to guide you.
- Early payment
DB doesn’t allow you to draw your pension funds earlier than the expected time. Therefore, you cannot get the benefit of the program until you have reached the pension age. Meanwhile, DC allows you to start receiving your payment even when you are still at active age.
DB pension has set a fixed amount of money that you will receive. Therefore, you don’t have any option to adjust the amount of your income. If you aim to have more flexibility in deciding the amount of money you will receive, then you should consider transferring your funds to a DC pension. You can change the sum of cash you will draw.
If you are registered to a DB pension, you should not expect a lot of financial profit that can be obtained by your beneficiaries, as it doesn’t pass your funds to your children. However, it still will give a widow’s pension to your husband or wife. On the other hand, a DC pension will accumulate the pension funds that are not drawn or spent and inherit them to your beneficiaries. And the good news is that it won’t charge you an inheritance tax.
- Higher chance to gain more money
Moving your pension pot from DB to DC also means increasing your possibility to acquire more profit, as the value of your DC pension is affected by the stock market. If the stock market is going well, then it will raise the amount of money you will obtain. But if it falls, then your pension pot will be at risk.
If you are considering transferring to a DC pension, then you will have more freedom in managing your retirement funds. You are the one who is responsible for the ups and downs of your pension. On the other hand, if you choose to stay with the DB pension plan, you should ensure that your previous company is financially stable, as it will jeopardize your pension savings.
Those are some things that you should consider between the two plans of defined contribution vs defined benefit pension plan. You should carefully decide which pension will help you achieve a prosperous retirement life.