A defined benefit (DB) pension scheme is one where the amount you’re paid is based on how many years you’ve worked for your employer and the salary you’ve earned
How it works
Defined benefit pensions pay out a secure income for life which increases each year. You may have one if you’ve worked for a large employer or in the public sector.
Your employer contributes to the scheme and is responsible for ensuring there’s enough money at the time you retire to pay your pension income. You can contribute to the scheme too.
When you can take your pension
Most defined benefit schemes have a normal retirement age of 65. This is usually when your employer stops contributing to your pension and your pension starts to be paid.
Depending on your scheme, you may be able to take your pension from the age of 55, but this can reduce the amount you get. It’s also possible to take your pension without retiring.
You may also be able to defer taking your pension. This might mean you get a higher income when you do take it. Check your scheme for details.
Once you pension starts to be paid, it will increase each year by a set amount (your scheme rules will tell you by how much) for life.
When you die, it may continue to be paid to your spouse, civil partner or dependants. This is usually a fixed percentage (for example 50%) of your pension income at the date of your death.
How to calculate your pension income
number of years in the scheme
accrual rate (i.e. 60th or 80th accrual)
For example, if:
you were in a pension scheme for 10 years
you retire at 65 on a salary of £24,000 a year
your scheme has an accrual rate of 1/60th
This would give you a pension of:
10 (years) multiplied by £24,000 (salary)
divided by 60 (accrual rate)
= £4,000 a year (less if you take any tax free cash lump sum).
Protection for insolvent pensions
The open-ended nature of the ‘pension promise’ has led some pension funds with insufficient funds to meet future commitments. So, to protect members of insolvent employers where there is a shortfall in the pension scheme, the Pension Protection Fund (PPF) was established by government to cover schemes that fail from April 2005 onwards.
The PPF ensures that:
Pensioners continue to receive the full amount due up to a cap of £36,401.19 at age 65
Others receive 90% of their expected pension - to a current maximum of £32,761.07 a year at age 65.
It is funded by a general levy on occupational salary-related schemes.
If you’re in a private sector defined benefit pension scheme or a funded public sector scheme, you can transfer to a defined contribution pension as long as you’re not already taking your pension.
Defined contribution pensions can be accessed flexibly from age 55 so this may seem like an attractive option.
But if you transfer from a DB pension scheme you are giving up valuable benefits and may find yourself worse off, even if your employer offers you incentives to switch. It’s a good idea to take advice from a regulated financial adviser who specialises in this type of transfer before you decide. If your pension savings are worth £30,000 or more, you will be required to take financial advice in any event.
If you’re in an unfunded defined benefit pension scheme (these are mainly public sector schemes), you won’t be able to transfer to a defined contribution pension scheme, but you’ll still be able to transfer to another defined benefit pension scheme.