Photo by Sarah Agnew on Unsplash
A defined benefit (DB) pension — sometimes called a “final salary” pension — is a workplace pension that pays you a guaranteed income in retirement, calculated based on how long you worked for the employer and your salary. The employer bears the investment risk, not you.
This is the opposite of the more common defined contribution (DC) pension, where your retirement income depends on how much has been paid in and how the investments have performed.
Defined benefit pensions are now rare in the private sector but remain common in the public sector — teachers, NHS staff, civil servants, firefighters, and police officers typically have them.
How Does a Defined Benefit Pension Work?
Your DB pension income is calculated using a formula. The most common type is the career average revalued earnings (CARE) scheme, which most modern public sector schemes now use:
Each year, a fraction of your pensionable pay is added to your pension “pot.” For example, in the NHS pension, this is 1/54th of your annual pay each year. That amount is then revalued (increased) in line with inflation each year until you retire.
Older “final salary” schemes (many of which closed to new members in the 2000s and 2010s) calculated your pension differently:
Annual pension = (Years of service × Accrual rate) × Final salary
For example: 30 years of service × 1/60th accrual rate × £40,000 final salary = £20,000 per year.
Key Features of Defined Benefit Pensions
Guaranteed income: Unlike a defined contribution pension, the amount you receive is fixed in advance. You can plan around it with certainty.
Inflation protection: Most public sector DB pensions increase each year in line with the Consumer Price Index (CPI), protecting the real value of your income in retirement.
Survivor’s pension: Most DB schemes pay a reduced pension to your spouse or civil partner if you die — typically 50% of your own pension.
Lump sum option: Many DB schemes allow you to commute some of your pension for a tax-free lump sum at retirement. You give up a portion of your ongoing income in exchange for a one-off payment. The ratio (commutation factor) varies by scheme.
No investment risk: Your employer manages the fund. Poor investment performance doesn’t reduce your pension — it’s a liability on the employer (or, for public sector schemes, ultimately on the government).
What Is a DB Pension Worth?
DB pensions are extremely valuable — more so than most people appreciate. A common way to estimate the value is to calculate how much money you’d need in a defined contribution pension to produce the same income.
If a DB pension pays £20,000 per year, you’d typically need a DC pot of approximately £500,000–£600,000 to generate the same income sustainably (using a 3.5–4% drawdown rate). The exact figure depends on your life expectancy, the inflation protection, and the survivor’s benefit.
This is why transfers out of DB pensions — receiving a cash equivalent transfer value (CETV) to take to a DC pension — are regulated and require independent financial advice for transfers above £30,000. The cash values offered can appear large (e.g., £400,000 for a £20,000/year pension), but losing the guaranteed income and inflation-linking is almost always a bad trade for most people.
Should You Transfer Out of a Defined Benefit Pension?
For most people, no. The FCA’s position is that transferring out of a DB pension is likely to be in your interest in only a minority of cases, typically:
- You have a serious health condition and shortened life expectancy
- Your scheme’s financial health is genuinely at risk (rare for public sector schemes, which are government-backed)
- You have significant other guaranteed income (e.g., other pensions, substantial property income) and don’t need the certainty
If you’re considering a transfer and the value is over £30,000, you’re legally required to take regulated financial advice first.
What Happens to a DB Pension If You Leave the Employer?
Deferred pension: If you leave before retirement age, your pension is “preserved” or “deferred.” The amount already accrued is held until you reach the scheme’s normal pension age and then paid out. It’s revalued in the meantime in line with inflation (up to specified caps).
Preserved rights: You keep the pension you’ve built up, but stop accruing new benefits once you leave.
You do not lose a DB pension by changing jobs — it stays with the scheme until you reach pension age, or you can transfer the cash equivalent to a new employer’s scheme or a SIPP (with advice if over £30,000).
Finding a Lost DB Pension
If you’ve lost track of a previous employer’s DB pension, the Pension Tracing Service (gov.uk/find-pension-contact-details) can help locate it using the employer’s name.
Summary
Defined benefit pensions provide a level of financial security in retirement that is increasingly rare:
- Your income is guaranteed regardless of investment markets — the employer (or government, for public sector schemes) bears the risk
- Most public sector schemes are CARE-based — you build up a fraction of each year’s salary, revalued for inflation
- DB pensions are extremely valuable — equivalent to a DC pot 20–30 times the annual pension in most cases
- Do not transfer out without regulated financial advice — the guaranteed income almost always outweighs the cash equivalent for healthy individuals
- A deferred pension stays with the scheme if you change jobs — use the Pension Tracing Service if you’ve lost track of old pensions
Next read: What is a self-invested personal pension (SIPP)? | https://moneyunpacked.com/what-is-a-self-invested-personal-pension-sipp/