Often called the 'gold standard' of pensions, a defined benefit (DB) scheme - also known as a 'final salary' or 'career average' pension - is one of the most valuable financial assets you can own. But with this value comes great complexity.
You may have questions about what it's really worth, whether you can take it early, or if you should consider transferring it. Here, we'll cover what a defined benefit pension involves, how it works, and how an independent, specialist financial adviser can help you make the proper, informed decisions for your retirement.
What is a defined benefit pension?
A defined benefit pension is a type of workplace pension that provides a guaranteed, inflation-proof income for the rest of your life from a set retirement age.
The amount you receive is not based on investment performance or how much you've paid in. Instead, it is "defined" by a specific formula set by the scheme. This formula is typically based on:
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Your pensionable service (how many years you've worked for the company).
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Your pensionable salary (either your final salary or a career average).
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The scheme's accrual rate (the fraction of your salary you earn as a pension each year, e.g., 1/60th or 1/80th).
With a DB pension, all the investment risk is taken on by your employer, who is responsible for ensuring there is enough money in the scheme to pay your promised pension for life.
How does a defined benefit pension work?
The scheme's rules dictate the exact calculation, but a typical example looks like this:
Example Calculation:
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Pensionable Service: 30 years
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Pensionable Salary: (Final Salary) £50,000
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Accrual Rate: 1/60th
Calculation: 30/60 x £50,000 = £25,000 per year
This person would receive a guaranteed, inflation-linked pension of £25,000 every year for life from their retirement date. Most schemes also offer the option to take a tax-free cash lump sum in exchange for a lower annual pension.
Defined Benefit vs. Defined Contribution
It's crucial to understand the difference between these two main types of pensions.
|
Feature |
Defined Benefit (DB) |
|
|
What you get |
A guaranteed income for life, based on a formula. |
A pension pot of a variable cash value. |
|
Investment Risk |
Your employer takes all the risk. |
You take all the risk. |
|
How it's valued |
By the annual income it will pay (£X per year). |
By the current pot size (£X total). |
|
Flexibility |
Very little. You get a set income from a set age. |
Very high. You can take the money how you wish from age 55 (57 from 2028). |
|
Commonly found |
Public sector, or older private sector schemes. |
Most modern private sector workplace pensions (auto-enrolment). |
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What is a Cash Equivalent Transfer Value (CETV)?
A Cash Equivalent Transfer Value (CETV) is the lump sum your DB pension scheme will offer you to leave the scheme and give up your right to the guaranteed income.
This value can often be a very large, life-changing sum of money. You would transfer this cash value into a defined contribution (DC) pension, giving you full flexibility over how you invest and access it.
Important: If your CETV is valued at £30,000 or more, you are legally required to take regulated financial advice from a specialist 'Pension Transfer Specialist' before you can transfer.
How our independent advisers can help with your defined benefit pension
Owning a defined benefit pension puts you in a fortunate but complex position. The decisions you make are irreversible and have a massive impact on your future. Our independent, specialist advisers are qualified to guide you through this.
Here are the key services we can provide:
1. Understanding Your Scheme
Your annual pension statement can be confusing. An adviser will translate it for you, explaining:
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Your 'Normal Retirement Date'.
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The impact of taking your pension early (an 'actuarial reduction').
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The impact of taking it late (an 'actuarial increase').
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Your tax-free cash options.
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What death benefits are available to your spouse or dependents.
2. Specialist Defined Benefit Transfer Advice
This is the most critical service. You may be tempted by a large CETV, but giving up a guaranteed income is a huge risk. Our advisers will:
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Conduct a full analysis to compare the guaranteed benefits you're giving up against the flexible benefits of a DC pot.
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Assess your personal circumstances, including your health, other pensions, savings, and your overall retirement goals.
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Evaluate your attitude to investment risk. Can you afford to (and are you comfortable with) taking on the risk that your new DC pot could run out?
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Provide a clear recommendation on whether a transfer is, or is not, in your best financial interests. For most people, staying in the DB scheme is the right answer, but for some (e.g., those in poor health or with no dependents), a transfer might be suitable.
3. Holistic Retirement Planning
Your DB pension is just one piece of your retirement puzzle. An adviser will:
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Build a complete cashflow model showing how your DB pension, State Pension, ISAs, and any other pensions will work together.
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Advise on tax-efficient withdrawals to ensure you don't pay more tax than necessary in retirement.
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Integrate your partner's finances to create a retirement plan for your whole household.
4. Assessing Scheme Security
We can review the health of your pension scheme, its funding level, and explain the protection offered by the Pension Protection Fund (PPF), which acts as a safety net if the sponsoring employer goes bust.
5. Inheritance and Estate Planning
A key weakness of DB pensions is their poor death benefits (often just a 50% spouse's pension and nothing for children). If your priority is passing wealth to your family, an adviser can assess whether a transfer (where the full DC pot can be inherited) is a valid consideration.
Get started here to book a free pension review and a no-obligation chat with an independent financial adviser who specialises in defined benefit pensions.
FAQs
For the vast majority of people, no. The Financial Conduct Authority (FCA) states that advisers should start from the position that staying in the scheme is the best advice. Giving up a guaranteed, inflation-linked income for life is a significant risk.
However, a transfer might be suitable in very specific circumstances, such as having a short life expectancy, having no financial dependents, or having a strong priority for flexible access and inheritance. This is a complex, irreversible decision that demands specialist advice.