Defined benefit pension UK — what it is and how it works

A defined benefit (DB) pension — sometimes called a final salary pension or career average pension — is a type of workplace pension that guarantees you a specific income in retirement, based on your salary and how long you worked for your employer. Unlike defined contribution pensions, where your retirement income depends on how much you save and how investments perform, a defined benefit pension provides certainty about what you will receive.

Defined benefit pensions are now rare in the private sector but remain common in the public sector, covering many teachers, NHS staff, civil servants, police officers and local government workers.

How does a defined benefit pension work?

The income you receive from a defined benefit pension is calculated using a formula based on two main factors: your salary (either your final salary or a career average) and your years of pensionable service. The scheme applies an accrual rate — typically expressed as a fraction such as 1/60th or 1/80th — to calculate your annual pension.

For example, under a 1/60th scheme, someone who worked for 30 years and retired on a final salary of £30,000 would receive a pension of 30/60ths of £30,000 — which is £15,000 per year. Under a career average scheme, the calculation is based on an average of your salary throughout your membership, usually revalued each year in line with inflation.

Your pension is paid for life from your retirement date, regardless of how long you live. This provides protection against the risk of outliving your savings — a key advantage over defined contribution pensions, where the pot could run out.

Final salary vs career average

Older defined benefit schemes were typically final salary schemes, where your pension was based on your pay at or near retirement. These were very valuable for people whose salary grew significantly during their career. Many public sector schemes have since moved to career average revalued earnings (CARE) schemes, which base the pension on an average of career earnings rather than final salary. CARE schemes are generally less valuable for high earners whose salary rises significantly towards retirement, but more equitable across the workforce.

What are the benefits of a defined benefit pension?

Defined benefit pensions are widely regarded as the most valuable form of pension available. Their key advantages include a guaranteed income for life regardless of investment performance or how long you live, inflation protection (most DB pensions increase annually in line with inflation up to a cap), a spouse or partner's pension payable on your death, and no investment risk borne by the member. The employer bears all the investment and longevity risk — if the pension fund underperforms, it is the employer's responsibility to make up the shortfall.

Can you transfer out of a defined benefit pension?

It is possible to transfer out of a defined benefit pension into a defined contribution pension (such as a SIPP), but this is a significant and largely irreversible decision. When you transfer, the pension scheme calculates a cash equivalent transfer value (CETV) — the lump sum value of your future defined benefit entitlement — which is paid into your new pension.

Transferring out gives up all the guarantees of the defined benefit scheme — the guaranteed income, the inflation protection, the spouse's pension and the longevity protection — in exchange for a cash pot that you then invest yourself. For most people with a defined benefit pension worth more than £30,000, the law requires them to take regulated financial advice before transferring. The FCA has consistently found that, for most people, staying in a defined benefit scheme is in their best interest. Transfers are generally only worth considering in specific circumstances, such as serious ill health or unusual personal financial situations.

How is a defined benefit pension taxed?

Income from a defined benefit pension in retirement is taxable as income, in the same way as employment income. You receive a personal allowance (currently £12,570 — check HMRC for current figures) and pay income tax on anything above this threshold at the relevant rate. Many DB pension schemes also allow you to take part of your pension as a tax-free lump sum at retirement, in exchange for a reduced ongoing income.

What happens if your employer goes bust?

If your employer becomes insolvent and the pension scheme does not have sufficient assets to meet its obligations, the Pension Protection Fund (PPF) provides a safety net for eligible members. The PPF typically pays 100% of pension benefits for those already retired and 90% for those who had not yet reached retirement age, subject to a cap. This provides meaningful protection, though it is not a full guarantee in all circumstances.