I’m disillusioned in my desk job and considering a career change. Obviously pensions are only one consideration but I was wondering which careers give the best options? It’s pretty clear that it’s the public sector jobs that come out on top, but what are the ultimate ‘best’ schemes out there?

Anonymous

Tom Selby, AJ Bell Head of Retirement Policy, says:

There are broadly two types of workplace pension scheme available in the UK – ‘defined benefit’, or DB, schemes and ‘defined contribution’, or DC, schemes.

As you suggest in your question, DB schemes are primarily the preserve of the public sector these days, with most private sector DB schemes closed to new members.

THE GOLD STANDARD

If you are lucky enough to benefit from a DB pension, you are very much in receipt of a gold standard retirement package. Your retirement income will be based on the number of years you are a member of the scheme and your salary, and you will receive your pension at your ‘normal retirement age’. This is often, but not always, pegged to the state pension age, which is currently 66 but due to rise to 67 by 2028 and 68 by 2046.

For each year you are a member of a DB scheme, you will ‘accrue’ a right to a proportion of your ‘career average’ or ‘final’ salary. Public sector schemes shifted to a career average basis a few years ago as part of wider pensions reforms initiated by the coalition government.

Different DB schemes will have different accrual rates. As an example, if you are a member of a one fiftieths accrual career average DB scheme, for every year you are a member of the scheme, you will build up a right to one sixtieth of your average salary. If you were a member of that scheme for 30 years and had an average salary of £60,000, your annual pension at normal retirement age would be £30,000 a year.

This income will also usually come with valuable inflation protection and your spouse may receive a portion of your retirement income if you die too. In addition, most DB schemes allow you to receive a tax-free lump sum, although you may need to accept a reduction in your retirement income in exchange.

Most DB schemes will require you to pay a percentage of your salary into the scheme in order to accrue a pension. These contribution rates will vary from scheme to scheme, and sometimes within schemes as well.

DEFINED CONTRIBUTION SCHEMES

The majority of Brits will be building up a retirement pot via a workplace DC scheme, with personal pensions such as SIPPs offering an alternative for those who value a bit more choice and flexibility.

Where DB schemes promise you an income from a certain age that is backed by your employer, DC schemes allow you to build up your own pension pot, usually via a combination of employee and employer contributions and upfront pension tax relief. Your money is then invested for the long-term, with any growth your fund enjoys completely tax-free whilst in the pension.

Under automatic enrolment rules, your employer has to provide you with a pension scheme that meets minimum standards. In terms of contributions, one of the key components of building a decent retirement pot, the auto-enrolment minimum is 8% of earnings between £6,240 and £50,270, with 4% coming from the employee, 3% from the employer and 1% via pension tax relief. However, lots of employers offer DC schemes with much more generous matched contributions than this, so it’s worth checking with your employer (or prospective employer).

You can access your DC pension from age 55 (rising to age 57 in 2028) but, unlike a DB scheme, it is up to you to decide how to turn that pot of money into a retirement income. You can buy a guaranteed income from an insurance company (an annuity), keep your pension invested while taking a flexible income (drawdown) or take ad-hoc lump sums direct from your retirement pot. You can also mix and match these options. It’s crucial when doing this you consider the sustainability of your withdrawal plan, as taking too much, too soon could leave you relying on the state in your later years.

SUMMING UP THE DIFFERENCES

In summary, DB and DC schemes are very different, with different strengths and weaknesses. A DB scheme offers security in retirement backed by your employer and often comes with generous terms, whereas DC is more flexible and allows you to build a retirement income plan to suit your needs.

DC schemes also give you the opportunity to invest for long-term growth, although this is not guaranteed as investments can go down in value as well as up. In addition, a DC pension allows your beneficiaries to get anything left in the pot when you die, whereas DB will generally die with your spouse/dependant.

Regardless of which type of pension is on offer, it’s really important to check the pension terms when you’re scouting for jobs, because ultimately this will be a key part of your overall remuneration package.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to asktom@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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