Defined benefit vs defined contribution pensions

There are two main types of pensions: defined benefit pensions and defined contribution pensions. While both help you save for retirement, they work in very different ways.

A defined benefit pension provides a guaranteed income based on your salary and how long you've worked for your employer. A defined contribution pension builds up a pot from contributions that are invested, with the final amount depending on what’s paid in and how the investments perform.

In this guide we'll explain how each type works and help you understand the key differences between them.

What is a defined benefit pension?

A defined benefit pension is a workplace pension that pays you a guaranteed income for life when you retire. Your employer sets up and manages the scheme, making most or all of the contributions, depending on your scheme’s rules.

How much you get is based on your salary and years of service, not on investment performance. Your employer or insurer carries the investment risk and is responsible for making sure there's enough money in the scheme to pay your pension.

If you're new to defined benefit pensions, our defined benefit guide will give you a practical introduction.

If your pension has been insured by Canada Life, learn how we support your retirement with our pensions.

What is a defined contribution pension?

A defined contribution pension is a workplace or personal pension where you build up a pot of money for retirement. You, your employer, or both make regular contributions into the pension, and this money is invested to help it grow. 

Unlike a defined benefit pension, there's no guaranteed income. The size of your pot depends on how much is paid in and how well the investments perform minus any management fees you may be charged. You carry the investment risk, and the value of your pension could go down if the market drops. This also means there’s potential for your pension to grow if investments perform well.

Defined contribution pensions are now the most common type of workplace pension in the UK.

Key differences between defined benefit and defined contribution pensions

The way these two pension types are structured and managed differs in several important ways.

Pros & Cons of defined benefit pensions

Pros & Cons of defined contribution pensions

How can I take my money from a defined benefit pension?

When you reach your scheme’s ‘normal retirement age’, your defined benefit pension pays you a regular income for life. This age is set by your scheme and may be different from your State Pension age.

Before you start receiving income, you may be able to take part of your pension as a tax‑free lump sum (up to 25%), depending on your scheme’s rules. The rest is converted into regular payments, which are taxed as income.

Some schemes let you take your pension earlier than the normal retirement age, but your income will be reduced to reflect the longer payment period.

How can I take my money from a defined contribution pension?

From age 55 (rising to 57 in April 2028), you can start accessing your defined contribution pension pot. You have several options for how to take your money:

• Take some or all of it as a lump sum (25% tax-free, the rest taxed as income)
• Take smaller amounts when you need them (known as ‘drawdown’)
• Buy an annuity for a guaranteed income
• Combine these options to suit your needs

Your pension pot isn't guaranteed to last for life, so you'll need to manage it carefully to avoid running out of money – especially if you retire early.

Learn more about the different approaches to taking your pension: Annuity vs. drawdown.

Can I have both types of pension?

Yes, you can have both defined benefit and defined contribution pensions. You might also have a personal pension (i.e. one that you set up yourself) alongside any workplace pensions. Many people end up with a mix of pension types by the time they retire, particularly if they've worked for several employers throughout their career.

Can I transfer from a defined benefit to a defined contribution pension?

In some cases, you can transfer your defined benefit pension to a defined contribution pension. However, transfers aren't allowed if:

• You've already started taking your pension
•  You're part of certain public sector schemes, such as teachers' or NHS pension schemes.

If your defined benefit pension is valued at over £30,000, you must take regulated financial advice before transferring. Even if it’s under this amount, it can still be helpful to get financial advice, as it’s a big decision to give up guaranteed income for life.

If you're considering transferring, start by reading What is a defined benefit pension transfer?

Learn more about defined benefit pensions