Understanding the Difference: Defined Benefit vs. Defined Contribution

A Defined Benefit (DB) pension, also often called a final salary scheme, is designed to pay you a guaranteed income for life when you retire. The amount you receive in retirement depends on your earnings and how long you were a member of the scheme. You don’t control the investments, instead, your former employer takes on the risk and guarantees the income.

These pensions are commonly offered by public sector bodies and large corporations. They’re increasingly rare in the private sector but are still highly valued due to the security and predictability they offer.

Key features include:

• Income based on final or average salary and years of service
• Indexed to inflation (in many cases), protecting purchasing power
• Usually includes a spouse or dependent benefit if you pass away
• Not accessible as a lump sum beyond a tax-free portion
• Limited flexibility, particularly if you live overseas or want to access funds early

For expats, DB pensions can feel rigid. They’re typically paid in GBP, which creates currency risk for those living outside the UK. And while they can be transferred into more flexible schemes, it’s a move that must be handled with caution.

A Defined Contribution (DC) pension, also known as a money purchase scheme, works differently. You and your employer contribute money to an investment pot over time. The value of that pot at retirement depends on how much is paid in and how well the investments perform. It works much the same as any other investment pot, but with the tax-advantages of the pension rules.

With a DC scheme, there are no guarantees. Unlike a DB pension, the retirement income is not fixed and will instead depend on the amount you’re able to accumulate through contributions and investment returns. But what you lose in certainty, you gain in flexibility.

You can:

• Choose when and how to access your pension (usually from age 55 or later)
• Opt for income drawdown or buy a guaranteed annuity
• Withdraw lump sums, subject to tax rules
• Pass on unused funds to your heirs
• Manage your investments to suit your goals and risk tolerance

For expats, DC pensions can sometimes offer greater practical value. You can consolidate multiple schemes, manage currency exposure, and tailor your drawdown strategy to suit your tax residency.

Feature	Defined Benefit Pension	Defined Contribution Pension
Income in Retirement	Guaranteed income for life, based on salary and service	Based on contributions and investment performance
Investment Risk	Taken on by the employer or scheme provider	Taken on by the individual
Flexibility	Low – income is fixed and follows scheme rules	High – flexible access, including drawdown and lump sums
Inflation Protection	Often index-linked to protect against inflation	No built-in protection. Must be managed through investment choices
Dependent Benefits	Typically includes ongoing payments to a spouse	Can be passed on as a lump sum or drawdown fund
Transferability	Can be transferred, but usually complex and regulated	Easily transferred or consolidated across providers
Suitability for Expats	May be less practical due to payment currency and rigidity	Generally, more compatible with international mobility
Access Timing	Defined by scheme rules, often less flexible	Accessible from age 55 (rising to 57 from 2028 in the UK)

Even if you feel that a DC scheme would work best for you, it’s important to understand that transferring a DB scheme is a big decision that can have serious consequences. It’s also one of the few decisions in your financial life that can’t be reversed if you change your mind in the future.

In terms of transfer value, DB schemes tend to offer a lump sum that reflects the present value of your future income, known as a cash equivalent transfer value (CETV). CETVs can be attractive, especially when interest rates are low, but transferring a DB pension is not something to be rushed into. In fact, it’s a legal requirement that you receive regulated financial advice before doing so if the value is above £30,000.

Navigating pensions across borders isn’t easy, but tech tools can bring clarity and control to even the most complex retirement plans. The Hoxton Wealth App offers a great example with WealthFlow, a module designed to track and project retirement income from various sources.

It can help you:

• View pension pots in one place, including international accounts
• Model drawdown strategies and simulate outcomes
• Assess how different pension types contribute to your overall plan
• Project future income based on lifestyle needs and location
• Track your net worth in real time, across currencies and accounts

This kind of visibility is especially useful when comparing DB and DC options. Seeing the projected lifetime value of a DB income stream versus managing a drawdown strategy from a DC pot can make complex decisions easier to understand.

The type of pension you hold has a huge impact on your retirement planning. Defined Benefit pensions offer security but lack flexibility. Defined Contribution pensions give you control but require more engagement and carry more risk.

For internationally mobile individuals, understanding the pros and cons of each is even more important. Whether you're evaluating a pension transfer, planning for drawdown, or simply trying to get organised, the first step is knowing what you have—and how it fits into your broader goals.

At Hoxton Wealth, we help clients make informed pension decisions that support their long-term financial strategy. Whether you’re weighing a transfer, consolidating pots, or planning your retirement income, our advisers provide clear, practical guidance tailored to cross-border lifestyles.

To understand your pension options and build a strategy that suits your life, get in touch with Hoxton Wealth today.