What is a defined benefit pension?
The name says it all: the benefit (the amount of money you’ll get when you retire) is defined by the rules of the pension scheme. You don’t have to worry about how your investments perform or how the stock market behaves. You’ll get a set amount, usually based on:
- Your salary
- How long you’ve worked for your employer
Think of it like this: the longer you work and the more you earn, the bigger your pension will be.
How do defined benefit pensions work?
Defined benefit pensions usually pay an annual income that’s based on a percentage of your final salary multiplied by the number of years you’ve worked with that employer.
That’s the “defined” part - it’s predictable. Defined benefit pensions are sometimes referred to as final salary or career average pensions.
How you get a defined benefit pension?
You can only get a defined benefit pension through an employer. They’re usually offered by:
- Some public sector pension schemes
- Larger companies if you started working there a few decades ago
They’re less common today because they’re expensive for employers to maintain. Many companies now offer defined contribution pensions instead, where the amount you get depends on how much you and your employer contribute over the years, and how your investments perform.
What are the benefits of a defined benefit pension?
- Reassurance: You know exactly what you’ll get
- Lifelong income: Will pay out for the rest of your life
- Inflation protection: Some defined benefit pensions increase each year to keep up with rising prices
Other considerations to be aware of
- Flexibility:
- Some defined benefit pension schemes allow you to start taking your pension from 55 years old and it is possible to do this without retiring. However, this will change to 57 years old from April 2028. Find out more at Gov.uk.
- If you’re yet to retire, you may be able to transfer benefits to another registered pension scheme. Please be aware that if your defined benefit pension is worth £30,000 or more (on current rules), you’re required to get professional financial advice from an independent, FCA-authorised adviser prior to any potential transfer. That’s because you’ll be giving up a guaranteed pension and may not be able to get the same level of income in the scheme that you’re transferring to. There may also be financial penalties to moving the money.
- Complex rules: Retirement age, survivor benefits, and inflation adjustments are examples of how DB pensions can vary. That’s why seeking advice is so important before you access your retirement savings from a DB pension.
Can you have both a defined contribution and a defined benefit pension?
Yes. With each new employer you could become a member of a new pension scheme, which could be either a defined benefit or a defined contribution one. You might even end up with a hybrid pension that combines the benefits of both types of pension. You’ll probably only be paying into one pension scheme at any given time, though.
Can you have multiple pensions at the same time?
Yes – if you’ve had more than one employer over the years it’s likely you’ll also have several different pensions up and running. It can be difficult to keep track of them all. . You can use the Government’s free pension tracing service to find your lost pensions.
What happens to your defined benefit pension when you die?
Some DB pensions offer a survivor’s benefit, meaning your spouse or partner may continue to receive part of your pension after you pass away. The details vary, so it’s worth checking your scheme’s rules.