Defined Benefit Pensions: What You Need to Know

What is a Defined Benefit (DB) pension?

A Defined Benefit pension scheme is a specific type of workplace pension that promises to pay you a guaranteed monthly income after you retire. Unlike other types of pensions, where your retirement income depends on how much you've paid into your pension pot (referred to as your pension contributions, as well as how the investments in your pension fund perform, Defined Benefit pensions guarantee a set amount based on factors like your final salary and the length of your service in that job.

That’s why they’re called ‘defined benefit’ - because the amount you get is specifically defined, rather than an unpredictable moving target.

What are the key characteristics of a defined benefit Pension?

The main features of Defined Benefit pensions that differentiate them from other types of pensions are:

• A guaranteed income for the rest of your life after you retire
• Significantly bigger employer contributions
• Inflation protection

Guaranteed income

The most valuable feature of Defined Benefit pensions is the guarantee of a fixed income for the rest of your life, no matter how long you live. This removes the risk of outliving your savings – a growing concern for many retirees.

With a DB pension this concern is removed because your pension payments should continue whether you live to 85, 95 or 105.

Bigger employer contributions

With DB pensions, your employer contributes significantly more to the pension than the minimum required for other workplace pensions – often equivalent to 15% to 25% of your salary, or possibly even more.

Inflation protection

Most Defined Benefit schemes include annual increases to protect your pension against the risk of inflation. These increases are often linked to the Consumer Price Index (CPI) or Retail Price Index (RPI), ensuring your pension maintains its buying power throughout your retirement, although those annual increases will often be capped if inflation is very high.

How does a Defined Benefit pension work?

Defined Benefit pensions aren’t directly linked to your own pension contributions; instead, they rely on a specific formula to calculate your pension entitlement, so it’s important to understand this formula and how it can affect your retirement savings.

Formula-based income

Your DB pension uses the following formula to calculate your pension income:

Annual pension = (pensionable salary ÷ your scheme’s accrual rate) x your years of service

The pensionable salary depends on your scheme type:

• Final salary schemes use your pay at or near retirement.
• Career average schemes use your average earnings over your employment, adjusted for inflation.

When it comes to the accrual rate used in this calculation, this varies by scheme but the most common rates are 1/60 and 1/80. Schemes with an accrual rate of 1/80 will often have lump sum payments built into their calculations, while 1/60 accrual rates may not.

Employer-funded

Unlike Defined Contribution pensions, which are heavily reliant on both your own pension contributions and the performance of the investments those funds are invested in, Defined Benefit pensions are largely funded by the employer. It is the employer’s responsibility to make sure there are sufficient funds to cover the benefits that have been promised, so there’s little to no risk for the pension holder.

You may still contribute to your DB pension during the course of your career, but the amount you receive at retirement will be linked to your pensionable salary and years of service, which is why it’s less risky and more predictable.

Unfortunately most private employers no longer accept new enrolments into their DB pension schemes, which means they’re increasingly limited to employees in the public sector.

Who typically gets a Defined Benefit pension?

Defined Benefit pensions once accounted for the bulk of private pension schemes in the UK, but this began to change in the early 1990s, and very few private DB pensions are still open to new members now.

In fact, 2024 data from the Pensions Regulator reveals that just 4% of private Defined Benefit schemes are still open to new enrolments now.

The story is very different in the public sector, where a wide range of employees still have the option to join a Defined Benefit pension scheme. For example:

• Teachers in England, Wales and Northern Ireland: Most teachers in England, Wales and Northern Ireland will have access to the Teachers’ Pension Scheme (TPS), which is a Defined Benefit pension scheme for public-sector teachers. Teachers working at independent schools may also have access to TPS, but it depends on which school they work at and whether that specific school has been accepted into TPS.
• Teachers in Scotland: Teachers also have access to a Defined Benefit pension scheme, but it’s run separately from the one covering England, Wales and Northern Ireland, and is known as the Scottish Teachers’ Pension Scheme (STPS). Unlike TPS, the scheme in Scotland covers all teachers, both at public and private schools.
• NHS staff throughout the UK: The NHS Pension Scheme is a Defined Benefit scheme that is open to all eligible NHS employees in the UK, including doctors, nurses, surgeons, orderlies and administrators.
• Civil servants throughout the UK: The Civil Service Pension Scheme is a Defined Benefit scheme that is managed by the Cabinet Office and is open to all civil service employees in the UK.
• Military personnel: The Armed Forces Pension Scheme (AFPS) is a Defined Benefit pension scheme for members of the UK’s armed forces. Unlike other public sector pensions, the UK government contributes the full pension contribution for AFPS pensions, which means military personnel don’t have to contribute from their own salaries.
• Local authority employees: The Local Government Pension Scheme (LGPS) is a Defined Benefit scheme for employees of local authorities in England and Wales, while the Local Government Pension Scheme NI is open to local authority staff in Northern Ireland, and The Local Government Pension Scheme in Scotland is the DB pension scheme for local authority employees in Scotland.

Is a Defined Benefit pension good?

Many financial advisers view Defined Benefit pension schemes as the ‘gold standard’ of retirement savings, offering you predictable income and valuable protections that aren't available with other types of pensions.

While that gold standard is becoming much less common in the private sector, they’re still an option for many public sector employees and continue to provide retirement security for millions of UK workers.

What are the advantages of having a Defined Benefit plan?

Defined benefit pension plans have a range of advantages that make them highly valuable:

• Predictable income: You know exactly what you'll receive in retirement, making budgeting and financial planning easier.
• Longevity protection: Your pension continues for life, regardless of how long you live.
• Inflation protection: Most DB pensions offer gradual increases to account for inflation, although there will often be a cap on the size of this increase.
• Spousal/dependents’ benefits: Your spouse, civil partner or dependents’ will often receive a portion of your pension if you die.
• Less ongoing management: Since DB pensions offer a guaranteed income, they often require less ongoing management on your part.

What are the disadvantages of having a Defined Benefit plan?

Despite their advantages, Defined Benefit pensions do have some limitations, such as:

• Less flexibility: You can't usually adjust contribution levels or retirement timing as easily as with DC pensions.
• Restricted portability: Transferring between employers can result in reduced benefits.
• Reduced benefits if you leave early: Leaving before the normal retirement age can result in a significant reduction in your retirement benefits.
• Limited death benefits: Unlike DC pensions, there's usually no option for a large lump sum payout for your estate if you have a DB pension.

How are Defined Benefits pensions calculated and paid?

Your final pensionable salary forms the foundation of your pension calculation, but your scheme’s accrual rate will also factor into the calculation, as will your number of years of service in the job.

Accrual rates

The ‘accrual rate’ is the proportion of your salary that you ‘accrue’ in your pension for each year of service.

The most common accrual rates for a DB pension are 60 or 80, which means your pension amount would be calculated by multiplying your salary at or near retirement by either 1/60 (if your scheme had an accrual rate of 60), or by 1/80 (if the accrual rate was 80) for each year of service.

So as an example, if your final salary was £50,000, your DB pension had an accrual rate of 60, and you worked there for 18 years, the calculation would look like this:

50,000 x (18/60) = 15,000

In this scenario, your retirement income once you retire (and assuming you don’t retire early), would be £15,000 a year, equating to monthly pension payments of £1,250 before any inflation-related adjustments.

Normal retirement age

Each Defined Benefit scheme sets its own normal retirement age (NRA), which is the age at which you can take your full pension without any reductions. Many private sector schemes have NRAs of 65, but older ones might have an NRA of 60. 

Some public sector schemes have lower NRAs than 65 or 60.

It is often possible to retire early, but your pension calculation would be adjusted downwards using an actuarial reduction to account for this early retirement.

Inflation protection

Most Defined Benefit pension calculations include some degree of upward adjustment to offset the impact of inflation, but exactly how much inflation protection you’ll get (and what cap you might have on this adjustment) will depend on your particular pension scheme rules.

Contribution structure

Unlike Defined Contribution pensions, where the size of your contributions can vary and you can adjust them over time, with a Defined Benefit pension your own contributions will usually be based on a fixed percentage of your annual salary.

This might be between 4% to 9% of your salary, depending on your scheme’s rules, but importantly your employer bears much of the burden of funding the pension payments you receive at retirement, and that income will be guaranteed rather than being limited by the amount you contributed.

In fact, employers often contribute as much as 15% to 25% of your salary to your DB pension each year to help fund your future pension withdrawals, whereas with DC pensions your employer is only obliged to contribute 3% of your salary.

Career average vs. final salary

The ‘pensionable salary’ that is factored into your Defined Benefit pension calculation will differ depending on whether your scheme is a final salary scheme or a career average revalued earnings (CARE) one.

• Final Salary Schemes: With these schemes, the pensionable salary used in your pension calculations will either be the salary you were being paid during the year before you retired, the salary you received at your scheme’s Normal Retirement Age, or the average of your best three consecutive salaries.

Career Average Revalued Earnings Schemes: CARE schemes use a similar approach to the average of your best three salaries, but averaging your salary across your whole career with that employer. Since inflation needs to be taken into account, CARE schemes will adjust salary figures from earlier in your career upwards to offset the impact of inflation.

How do I withdraw my Defined Benefits pension?

After you retire your Defined Benefit pension will usually be paid into your bank account on a monthly basis, and the amount will be the same every month for the rest of your life, except for possibly some small annual increases to account for inflation.

While your scheme’s accrual rate, your final salary, and your years of service will all affect how much you receive each month, it’s also worth remembering that when you retire will affect these monthly withdrawals too.

• Retiring at your scheme’s Normal Retirement Age: Your DB pension scheme will specify its own Normal Retirement Age (NRA), but in many cases this will be between 60 and 67. If you retire at your scheme’s NRA then you'll be able to take your full pension without reduction, and it will be paid out to you in fixed monthly payments.
• Retiring early: While most Defined Contribution pensions allow you to retire and begin making withdrawals from the age of 55 (rising to 57 from 2028), some Defined Benefit pensions don’t allow this. And even if your particular scheme’s rules do permit it, it’s important to bear in mind that your pension amount will be reduced through a process known as "actuarial reduction" in order to take into account the fact that you’ll be receiving retirement income for a longer timeframe.
• Retiring late: On the other hand, if you decide to continue working beyond your DB pension’s Normal Retirement Age and defer your pension withdrawals because of that, then your pension should increase to reflect the shorter timeframe you’ll be receiving your retirement income.

How do pension freedoms affect Defined Benefits pensions?

The pension freedoms that were introduced in the UK in 2015 were aimed at giving people with Defined Contributions pensions more say over how they manage, transfer and withdraw their pension savings. Those pension freedoms weren’t aimed at Defined Benefit pensions.

However, one aspect of those pension freedoms that the government was concerned about when it introduced the new rules was the possibility that people with DB pensions might now be more inclined to transfer from a DB pension to a DC pension.

Since that kind of transfer often isn’t in the pensionholder’s favour, supporting legislation was introduced that requires people who have £30,000 or more in a Defined Benefit pension to seek expert advice from a financial adviser before they transfer from a DB pension to a DC pension.

Can I transfer my Defined Benefits pension?

Yes, it is sometimes possible to transfer from a Defined Benefit pension to a Defined Contribution pension, although unfunded public sector schemes don’t permit this type of transfer.

However, even if your own scheme does permit a transfer to a Defined Contribution pension, if your pension pot is £30,000 or more then you have a legal obligation to seek advice from a financial adviser before making that transfer.

It’s also worth considering why the government introduced that financial advice rule - in most cases DB pensions offer much better retirement benefits than DC pensions, so although you might gain more flexibility by transferring, it’s still unlikely to be a good financial decision.

When it might make sense (or not) to transfer your DB pension

There are a few scenarios where it might make sense to transfer out of a DB pension, such as:

• If you’re facing serious health conditions that significantly reduce your life expectancy
• If you have no spouse or dependants who would benefit from survivor pensions
• If you have a truly urgent need for flexible access to your retirement income before your schemes Normal Retirement Age
• If you have concerns about your employer's financial stability or scheme security (although it’s important to bear in mind that your DB pension will be protected by the Pension Protection Fund if something like this does happen).

Offsetting those scenarios, it’s incredibly important to bear in mind that there are many reasons against transferring out of a DB pension, including:

• Loss of guaranteed income for life
• Loss of inflation protection
• Loss of valuable survivor benefits
• Suddenly taking on investment risk
• Loss of higher employer contributions than DC pensions offer.

It’s those risks that make this a decision that would require guidance from a qualified financial adviser, and even with that advice transferring out of a DB pension is rarely the best course of action.

[Link to Pension Transfers page]

How are Defined Benefits pensions taxed?

Tax is a major consideration when you’re assessing how far your income will go, and Defined Benefit pension payments are classed as income so you’ll need to take tax into account.

Income Tax: Since it’s treated as income, you’ll be taxed at your marginal income tax rate on your DB pension payments. The first £12,570 of your total annual income will be tax-free under Personal Allowance, but the amount of income tax you pay beyond that will depend on your total income - income between £12,571 to £50,270 will be taxed at the basic rate of 20%, if you earn more than that you’ll pay 40% tax on anything between £50,271 to £125,140, and if you’re lucky enough to earn more than £125,140 then you’ll pay a rate of 45% for income over that level.

National Insurance: Unlike other sources of income, pension payments don’t incur National Insurance.

Annual Allowance: Since your Defined Benefits pension is correlated to your salary, a pay rise could result in a tax liability if the increased value of your pension exceeds your pension’s Annual Allowance.

For 2025-26 the Annual Allowance is £60,000, but that doesn’t mean your pension has to increase in value by that amount to incur tax. Instead, for DB pensions the real increase is multiplied by 16, which means your pension pot only has to increase by £4,000 in a single tax year to go above this Annual Allowance tax-free threshold.

Let’s look at an example:

• Pension value at the start of the year: £15,000 × 16 = £240,000
• Pension value at the end of the year: £19,000 × 16 = £304,000
• Annual Allowance input: £64,000

Lifetime Allowance: The Lifetime Allowance was abolished in April 2024, when it was replaced by three new allowances:

• Lump Sum Allowance: £268,275 is the maximum amount that can be taken tax-free during the pensionholder’s lifetime.
• Lump Sum and Death Benefit Allowance: A total tax-free allowance of £1,073,100, which comprises both the Lump Sum Allowance for the pensionholder during their own lifetime, and death benefits that allow beneficiaries to withdraw additional cash tax-free from unused pension funds if the pensionholder dies.
• Overseas Transfer Allowance: A maximum of £1,073,100 tax-free for overseas transfers.

These changes are more likely to affect people with very large pension pots, but they’re still worth bearing in mind.

[Link to Pension Tax page]

What Happens to a DB Pension when I die?

DB pensions usually include favourable death benefits, which means they can often provide a level of financial protection for your family that would be difficult (and expensive) to achieve using life insurance.

Spousal/Dependent Benefits: Most DB pension schemes will pay a proportion of your pension payments to your spouse, civil partner or dependents after you die. The actual amount can vary between schemes, with some paying out 50% of your pension amount to your spouse or dependants, and others paying as high as 66%. These payments usually continue for the survivor's lifetime, and in most cases they’ll include the same inflation protection as you would have gained yourself.

How Do I Manage and Keep Track of My DB Pension?

• Annual Benefit Statements: Explains what to look for (accrued pension, normal retirement date, etc.).
• Scheme Communication: Keep contact details updated with your employer or pension trustee (especially if you change jobs).
• Moving Jobs: DB scheme may become a deferred pension; confirm how it will be revalued until retirement.

It’s important to keep track of your pension - or pensions, if you have more than one, which is increasingly common nowadays. In fact, if you have more than one it’s even more important to keep on top of them… and even easier to lose track.

There are a couple of things that can help you track your DB pension, including:

• Your annual pension statements: It’s a good idea to review these statements each year, double checking things like:
  • Your accrued annual pension amount
  • An accurate record of your years of service in the job
  • An accurate retirement date (if you’ve already retired), or the scheme’s Normal Retirement Age (if you haven’t retired yet)
  • Your projected pension amount at retirement
  • Any potential changes to the scheme’s rules.
• Messages or letters from your pension scheme: It’s very important to ensure that your pension provider has up-to-date contact details for you (postal address, email address, and phone number) because otherwise you might miss important messages or letters alerting you to changes to your scheme.
• Moving jobs: If you leave an employer with a Defined Benefit pension then you and the employer will stop contributing to that pension pot, which means it will be classified as ‘deferred’. It’s important to double check how this deferred pension will be revalued between now and retirement, and also confirm when you’ll be able to access it. It’s also important to keep that pension provider updated with your new contact details anytime you move house, change your phone number or change your email address.

DB pensions and the Pension Protection Fund (PPF)

The Pension Protection Fund (PPF) provides a safety net for members of private sector DB schemes if the employer goes bust, but it’s important to note that the amount of compensation in this scenario will depend on whether or not you’ve already reached retirement when the company you were employed by collapses.

• Already retired: If you’ve already retired before your employer goes bust, and you’re past the scheme’s normal retirement age or were permitted to retire early due to ill health, then the PPF should ensure that you receive 100% of your pension.
• Haven’t retired yet: If you’re before retirement age when your employer goes under then the news isn’t quite as positive - in this case you’ll usually receive 90% of your expected pension, rather than the full amount.

It’s also important to note that the PPF has an annual cap on inflation-related adjustments which may be lower than the adjustment rate stated in your scheme’s rules. The PPF’s cap is the Consumer Price Index (CPI) inflation or 2.5%, whichever is higher.

The PPF’s compensation rules also used to have a cap on the maximum amount an individual pension holder could receive per year, but that was scrapped in 2021 after a Court of Appeal ruled that it was unlawful on the grounds of age discrimination.

Common myths about defined benefit pensions

“DB Pensions Are Always Better Than DC”

DB pensions are generally more secure, more predictable, and more valuable than DC pensions, but there are a few scenarios where someone might feel a DC better meets their needs. For instance, if they:

• Need flexibility: DC pensions generally offer more flexibility when it comes to accessing your retirement savings, so if this flexibility is a priority then you might feel that a DC pension is a better option. If you require flexible access to capital or want to leave substantial sums to beneficiaries, DC pensions might better suit your circumstances.
• Need to retire early: Some DC pensions might be less restrictive if you want to retire early, since most DC pension schemes will allow you to withdraw from your pension from the age of 55 (rising to 57 in 2028).

Still, for the vast majority of people the security and value of DB benefits greatly outweigh the advantages of DC ones, which is why a transfer from a DB pension to a DC one is rarely a good idea.

“I Can’t Take Any Lump Sum from My DB Pension”

Many Defined Benefit pension schemes allow you to exchange part of your pension for a tax-free lump sum, although it’s important to bear in mind that doing so will permanently reduce the annual amount you receive from your DB pension in later years.

It’s also important to note that the Lump-Sum Allowance applies in this scenario, meaning the maximum tax-free lump sum you could withdraw is £268,275.

“I Don’t Need to Review My DB Pension”

Your Defined Benefit pension offers a more predictable income that isn’t reliant on the whims of equity or bond prices, but that doesn’t mean you’ll never have to review it.

It would be a good idea to take particular note of any pension scheme rule changes that might impact your pension, and it’s also important to review your DB pension any time you face a major life change or milestone, such as:

• Getting married
• Getting divorced
• Having children
• The death of a spouse or civil partner.

When should I seek professional advice?

• DB Transfers: Mandatory for values over £30k.
• Complex Situations: If you have multiple DB pots or are considering partial retirement.
• Large Potential Tax Liabilities: If your benefits approach/exceed the lifetime allowance.

It’s mandatory that you speak to a qualified pensions adviser if you’re thinking of transferring a Defined Benefit pension and the value of your pension is £30,000 or more. But even if your pension is lower than this amount, it would still be highly advised to seek this specialist advice, because a DB pension offers benefits that no other retirement planning tool can offer, and you wouldn’t be able to change your mind after you transferred out.

Even if you are happy with your DB pension and aren’t planning to transfer it, there are a few other scenarios when it might be a good idea to seek professional financial advice:

• Complex pension arrangements: If you have multiple Defined Benefit pension pots, or a complex mix of DB and DC pensions, it would be a good idea to speak to an adviser who can outline the tax implications and drawdown options.
• Planning early retirement: If you’re thinking of retiring early it can be difficult to calculate the impact this might have on your retirement income in later years, so it would be sensible to consult a financial adviser about this plan.
• Large tax liabilities: If your total pension pot is large (or is likely to grow much larger before you reach retirement) it would be sensible to speak to a pensions adviser about how best to navigate the tax implications of this.

Frequently Asked Questions

Is a Defined Benefit pension the same as final salary​?

Not exactly. ‘Final salary’ pensions are a particular type of Defined Benefit pension, where benefits are calculated using your salary at or near retirement.

But DB pensions also include ‘career average’ schemes, formally known as Career Average Revalued Earnings (CARE) pensions, which use an average of your earnings throughout your career rather than your final salary.

Both types are very similar in practice, the difference is how pension payments are calculated.

Do Defined Benefit pensions increase with inflation​?

Yes, many Defined Benefit pensions include some degree of annual adjustment in order to offset the impact of inflation.

There’s usually a cap on how much it can be adjusted, which means during times of particularly high inflation (such as in 2022, when inflation peaked at 11.1% after Russia invaded Ukraine) this adjustment may not fully offset the effect of inflation on your pension payments.

Is it worth deferring a Defined Benefit pension?

Deferring your DB pension beyond the scheme’s normal retirement age often increases your pension to reflect the shorter payment period, but whether or not this is the best plan will depend on factors like your work life, your financial needs, your health, and your life expectancy.

You’ll need to balance the increased income this could offer you in later years against the years of pension payments you're deferring during the earlier years, and it might be worth speaking to a financial adviser about this decision.

Can I take my Defined Benefit pension early?

Many schemes do allow early retirement, but this is a big decision that could impact your pension payments because most schemes will reduce them through a process known as actuarial reductions.

Again, it might be a good idea to speak to a financial adviser first if you’re considering early retirement.

Should I transfer my Defined Benefit pension to a SIPP?

For the vast majority of people in the UK, the answer is almost always ‘no’ - transferring a Defined Benefit Pension to a SIPP is rarely the best decision.

If you were to do this you’d be giving up a guaranteed income, inflation protection, and survivor benefits that you simply wouldn’t receive from a SIPP or any other type of pension other than a Defined Benefit one.

You’re obliged to speak to a pensions adviser before you transfer a DB pension that’s worth £30,000 or more, but if you are considering this we’d recommend speaking to an adviser no matter how big your pension is, because this type of transfer is rarely the right move… and it’s also a transfer that can’t be undone later.

Is my Defined Benefit pension protected if my employer goes bust?

Yes, if you have a Defined Benefits pension that is provided by a private employer your pension will be protected if that company goes bust. The protection is provided through the Pension Protection Fund (PPF), and should cover 100% of your pension if you’ve already reached retirement age, or 90% of your pension if you hadn’t yet retired when the company went bust.

Can I have both a Defined Benefit and Defined Contribution pension?

Yes, it’s possible to have both a Defined Benefit pension and Defined Contribution one, and this is a very common occurrence for people who have worked in both the public sector and for private companies during the course of their careers.

If you do have multiple pensions it’s even more important to keep track of them throughout your career, including things like annual pension statements and updates from your pension schemes.

It’s also important to remember that tax relief like the Personal Allowance and the Annual Allowance are applied across all your pensions, rather on a pension-by-pension basis.

Can you inherit a Defined Benefit pension?

If you’re the spouse or civil partner of someone with a Defined Benefit pension it is possible to inherit their pension, although in most cases you won’t receive the same amount they would have received. Survivor benefits will usually provide you with an amount equal to between 50% and 66% of their pension payments.

If the pension holder doesn’t have a spouse or partner when they die, it is often possible for one or more of their children (or other dependents) to inherit their pension instead, but the specific rules around survivor benefits for dependents can vary between schemes so it’s important to check your own scheme’s rules.

Do you pay tax on Defined Benefit pension​?

The pension contributions should be tax free, but when you reach retirement age and begin receiving pension benefits the monthly payments you receive will be liable for income tax.

The amount you’ll pay in income tax will depend on your total annual income (including this DB pension, any other pensions you might have, and any other sources of income), with the first £12,570 of annual income being tax-free each year because of your Personal Allowance.