The benefits of final-salary pension plans

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Final-salary pension schemes are sometimes called gold-plated. Why?

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Mike Freer, of BWCI, replies:

BASICALLY, there are two main types of pension scheme although, with several different names for each, it can seem as though there are many more.

They are:

1. Defined benefit, also called DB, final salary or CARE (career average revalued earnings).

2. Defined contribution, also called DC or money purchase.

DB schemes are sometimes referred to as gold-plated because, as long as they are adequately funded, they will provide a guaranteed level of retirement income for the rest of your life. This income may also increase, depending on the rules of the scheme.

On the other hand, DC schemes operate a bit like a bank account. At retirement, you use whatever money is in your ‘pot’ to generate an income. How much income you get depends on the size of the pot. This is affected by both the contributions paid and the investment return achieved.

Therefore, the level of benefits from a DC scheme is not known until close to retirement.

The risk of poor investment returns falls on the individual whereas, with a DB scheme, your employer pays extra contributions to offset any poor returns. The greater certainty of a DB pension is one reason that it may be considered gold-plated.

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