A defined benefit (DB) pension scheme is one where the amount you’re paid is based on how many years you’ve worked for your employer and the salary you’ve earned.
Defined benefit pensions pay out a secure income for life which increases each year.
You might have one if you’ve worked for a large employer or in the public sector.
Your employer contributes to the scheme and is responsible for ensuring there’s enough money at the time you retire to pay your pension income.
You can contribute to the scheme too.
They usually continue to pay a pension to your spouse, civil partner or dependants when you die.
Your income is based on:
|Basis of income||How income is judged|
|Pensionable service||The number of years you’ve been a member of the scheme|
|Pensionable earnings||This could be your salary at retirement (‘final salary’), salary averaged over a career (‘career average’) or another formula|
|Accrual rate||The proportion of your earnings you’ll get as a pension for each year in the scheme (commonly 1/60th or 1/80th)|
You pension income is usually calculated like this:
For example, if:
This would give you a pension of:
10 (years) multiplied by £24,000 (salary)
Divided by 60 (accrual rate) = £4,000 a year (less if you take any tax free cash lump sum).
Your latest pension statement will give you an idea of how much your pension income might be.
If you haven’t got one, ask your pension administrator to send you one.
Statements usually show your pension based on:
If you’ve left the scheme, you’ll still get a statement every year showing how much your pension is worth.
In most cases your pension will increase by a set amount each year up until retirement age.
If your scheme allows you to take part of your pension as a Tax-free lump sum, make sure you know whether your statement shows the amount you’ll get before or after taking it.
Also, don’t forget that your actual pension income will be taxable.
Most defined benefit schemes have a normal retirement age of 65.
This is usually when your employer stops contributing to your pension and your pension starts to be paid.
Depending on your scheme, you might be able to take your pension from the age of 55, but this can reduce the amount you get.
It’s also possible to take your pension without retiring.
You might also be able to defer taking your pension.
This might mean you get a higher income when you do take it. Check your scheme for details.
Once you pension starts to be paid, it will increase each year by a set amount (your scheme rules will tell you by how much) for life.
When you die, it might continue to be paid to your spouse, civil partner or dependents.
This is usually a fixed percentage (for example 50%) of your pension income at the date of your death.
You might be able to take your whole pension as a cash lump sum.
If you do this, up to 25% of the sum will be tax free, and you’ll have to pay Income Tax on the rest.
You can do this from age 55 (or earlier if you’re seriously ill) and if:
If you’re in a private sector defined benefit pension scheme or a funded public sector scheme, you can transfer to a defined contribution pension as long as you’re not already taking your pension.
Defined contribution pensions can be accessed flexibly from age 55 so this might seem like an attractive option.
But if you transfer from a DB pension scheme you’re giving up valuable benefits and might find yourself worse off, even if your employer offers you incentives to switch.
It’s a good idea to take advice from a regulated financial adviser who specialises in this type of transfer before you decide.
If your pension savings are worth £30,000 or more, you’ll be required to take financial advice in any event.
If you’re in an unfunded defined benefit pension scheme (these are mainly public sector schemes), you won’t be able to transfer to a defined contribution pension scheme.
However, you’ll still be able to transfer to another defined benefit pension scheme.
Defined benefit schemes are protected by the Pension Protection Fund.
This pays some compensation to scheme members if employers become insolvent and the scheme doesn’t have enough funds to pay their benefits.
The compensation might not be the full amount and the level of protection depends on whether you’re:
If you can’t find the details for an old defined benefit pension scheme, you can use the Pension Tracing Serviceopens in new window to find it.