How do Defined Benefit pensions work?

[Deleted User]

When you pay in to the pension, does the money just sit in the bank? Is it invested?

mark55man

The simple answer is you shouldn't care as a DB is a promise to pay a certain level of benefit and its not your risk to create an investment plan to do that.

However, almost certainly there will be a cautious investment strategy that needs to match the liabilities (your benefits) with the assets (the money you and the company pay in). It is highly regulated and will mainly be in bonds with some equity and possibly (depending on size and advisors) some more specialist assets.

[Deleted User]

What if the company goes bust and there is no money to pay the promised amount?

Is there any way you can see where the NHS or other DB pensions are invested for example?

Albermarle

What if the company goes bust and there is no money to pay the promised amount?

There is a government fund that will pay out most of what is due :
https://www.ppf.co.uk/

My old company DB pension sends an annual statement , giving the values of the fund compared to last year and a breakdown of the funds it is invested in.
Although as already pointed out the exact value of the fund is not of direct interest .

GunJack

newbinvestor wrote: »

What if the company goes bust and there is no money to pay the promised amount?

Is there any way you can see where the NHS or other DB pensions are invested for example?

With DB schemes, the pension is not held by the company concerned, it's separate and held by trustees (& administrators) so that even if the company goes under, the scheme should carry on. If it's a well-funded scheme with a safe investment plan, there shouldn't be any problem if the company goes under. If there is an issue, the PPF should step in.

edit:- if the scheme is a public-sector one, there isn't always a set of investments behind them, they are just paid out of general taxation, so unless the country goes t*ts-up.......

[Deleted User]

Can you get a DB pension if you're self employed? I like the idea of it being guaranteed.

NedS

newbinvestor wrote: »

Can you get a DB pension if you're self employed? I like the idea of it being guaranteed.

No. You invest monthly over your working life, and when you retire you will have a pot of cash depending on how much you've invested and how those investments have performed. One option when you retire is to purchase an annuity with that pot of cash which will provide a guaranteed income for life, but annuities are currently considered to be quite poor value for money due to very low interest rates. However, things may be different by the time you retire.

mark55man

If you are being offered one or have a choice of employment with one then from that point of view go for even the worst of the scenes are livery likely to be gold plated and well protected

Albermarle

Can you get a DB pension if you're self employed? I like the idea of it being guaranteed.

As already said this is not possible . In any case DB schemes rely on high levels of contribution from the employers ( which is why a lot of employers have stopped them ).
So even if you could have a personal DB scheme then you would have to be funding yourself it to the tune of 25/30% of salary .
At the end of the day if you put 25% in a DC scheme for many years you would have a nice retirement pot anyway.

NedS

Albermarle wrote: »

As already said this is not possible . In any case DB schemes rely on high levels of contribution from the employers ( which is why a lot of employers have stopped them ).
So even if you could have a personal DB scheme then you would have to be funding yourself it to the tune of 25/30% of salary .
At the end of the day if you put 25% in a DC scheme for many years you would have a nice retirement pot anyway.

Agreed, my employer currently contributes 27.1% of my salary and I contribute a further 5.45% making 32.55% total contributions which probably gives you a reasonable expectation on the amount you should be saving or the 'value' of a DB scheme.

nigelbb

newbinvestor wrote: »

Can you get a DB pension if you're self employed? I like the idea of it being guaranteed.

No. A DB pension is effectively deferred salary that your employer promises to pay after you retire. In total it may well amount to an extra 50% or more on top of the salary you were paid while in work.