Defined Benefit Schemes in the UK

Defined Benefit Schemes | April 2024

Defined Benefit Schemes, also known as final salary schemes or defined benefit pensions, are a type of employer’s pension scheme in which a set formula is pre-determined by your final salary.

This type of scheme provides a higher retirement income than other pension schemes. This article will help you to understand DB schemes and how to get started with one if it’s suited to you.

Table of Contents

Understanding Defined Benefit Schemes

Defined benefit pension schemes provide members with a guaranteed income in retirement based on their salary and length of service. This contrasts with a defined contribution pension, where retirement income is dependent on investment performance. In a defined benefit scheme, the employer bears the investment risk rather than the employee, offering valuable security for members.

The pension benefits provided by Defined Benefit Schemes, are based on your final salary or average salary over your career. 

Final Salary Schemes offer a pension based on your salary when you retire or leave the scheme.

Alternatively, Career Average Pension Schemes calculate your pension based on your average career salary overtime. Both schemes provide a guaranteed income in retirement.

Public Sector Schemes are pensions provided by the state. Alternatively, Private Sector Schemes have mostly shifted to Defined Contribution Schemes or career average schemes due to high costs of providing these schemes. 

Despite this, those who are members of final salary schemes usually receive a higher pension income than those in other schemes.

Defined Benefit Pensions are protected by the Pension Protection Fund (PPF). If your employer cannot meet its pension obligations due to financial struggle, the PPF will pay you compensation. However, remember that the level of this compensation may differ from the full pension benefits you were promised by your employer.

Although defined benefit pensions were previously common in the private sector, they have dramatically declined in recent decades. Today, they are typically only offered in the public sector and some large established companies. This decline is due to factors like people living longer, low interest rates and volatile stock markets. Consequently, this makes defined benefit pensions costlier for employers.

Key Features of Defined Benefit Schemes

The key feature of a defined benefit pension is that it guarantees pension savings based on a formula using your salary and years of service. This offers valuable certainty and security, unlike defined contribution pensions where retirement income relies on investment performance.

A defined benefit scheme may also offer an initial tax-free lump sum upon retirement, in addition to the regular pension income. As the rules around taking a lump sum vary between different pension schemes, it’s important to understand the rules of your personal pension scheme outlined by your employer.

Defined benefit schemes may also benefit your spouse or civil partner if you pass away, providing financial security for your loved ones. Although this is a common feature, again, the specifics vary between pension schemes.

Another key characteristic of defined benefit schemes is that your employer holds responsibility in ensuring enough money in the scheme to meet their promised benefits. Therefore, your employer bears the investment risk and commitment to making up any shortfalls. 

This differs significantly to Defined Contribution Schemes, where the employee holds the investment risk.

Furthermore, defined benefit pensions often include valuable benefits for your spouse, partner or dependents if you die before retiring or after retiring. For instance, providing an ongoing pension income for your partner. As these benefits can vary, it is important to check your scheme’s specific requirements.

How Defined Benefit Schemes Work

You become a scheme member upon joining a defined benefit pension scheme. New members will then begin to pay into the scheme, usually deducted from their salary and topped up by their employer. In many cases, you may also pay National Insurance contributions.

The amount received in a pension is calculated using a formula, considering your salary, either your final salary or career average salary. It will also factor in your years of service, how long you’ve been a scheme member and the accrual rate. This is a fraction of your salary for each year of service. 

For example, if you have been a member of the scheme for 30 years, and the scheme promises a 1/60th accrual rate, you will receive a pension equivalent to half of your final salary. This income is typically payable for life, and is usually adjusted yearly for inflation. This ensures that your buying power remains consistent throughout your retirement.

When you reach retirement age, you will start receiving your pension income. With many schemes, you can take some of your pension benefits earlier. Consequently, this may leave you with a reduced pension. Some schemes also allow you to take a tax-free lump sum upon retirement. 

defined benefit pension

Advantages and Disadvantages of Defined Benefit Pensions

A clear pro of a defined benefit pension is the guaranteed income they provide in retirement, which can be reassuring. 

Particularly, in times of volatile economies. Other benefits include the fact that the employer bears the investment risk. Moreover, the potential to receive a lump sum with tax relief and benefits for your spouse or dependents adds to the scheme’s appeal.

Here is a comprehensive list of advantages.

Predictable, secure income

  • Members get a predictable, secure income after retirement based on their salary and years of service
  • Benefits are pre-determined by a formula and not subject to investment market fluctuations

Employer bears the investment risk

  • Employer is responsible for funding the promised benefits
  • Employer bears the risk of poor investment returns

Rewards long service

  • Benefits accrue as years of service increase
  • Long-serving employees get proportionately higher pensions

Potentially higher benefits

  • Defined benefits are often more generous than defined contribution schemes
  • Higher inflation-linked income likely compared to personal accounts

Annuity rates

  • Can benefit from better annuity rates when converting pension pot to income
  • Group annuity rates negotiated by the employer are better than individual rates

Spouse benefits

  • Often provide survivor pensions to a spouse after a member’s death
  • Benefits do not end if a member dies before retirement age

"One of the main drawbacks is the lack of flexibility. Unlike Defined Contribution Schemes, where you can access your pension pot from the age of 55"

Alternatively, it is important to note that Defined Benefit Schemes are not without disadvantages. 

One of the main drawbacks is the lack of flexibility.

In Defined Contribution Schemes, you can access your pension pot from the age of 55.

Defined Benefit Schemes have stricter rules about when you can access your pension money.

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Here is a list of disadvantages.

Investment risk for employer

  • Employer bears the risk of funding shortfalls if investments underperform
  • Additional employer contributions may be needed to fund promised benefits

Costs can be unpredictable

  • Fluctuating market conditions make costs unpredictable for the employer
  • Rising life expectancies also increase costs for the employer

Inflexible for employees

  • Employees cannot usually take their pensions with them when changing jobs
  • Lack of portability can limit job mobility

Complex administration

  • Defined benefit schemes are complex to manage and administer
  • Require regular valuations and complex accounting calculations

Risk of underfunding

  • Schemes can go into deficit if assets are less than liabilities
  • Employers may struggle to make up shortfalls in times of financial difficulty

Closing schemes

  • Many employers are closing schemes to new entrants to reduce costs and risks
  • New employees miss out on potentially generous benefits

Lack of transparency

  • Difficult for members to calculate their expected retirement income
  • Final income dependent on complex formula of salary and service

Lack of flexibility

  • Usually cannot alter retirement date or take lump sums
  • Lack flexibility compared to defined contribution schemes
defined benefit pension plan

Impact of Defined Benefit Schemes on Retirement

Having a Defined Benefit Pension can provide financial and planning security in retirement. This certainty is particularly valuable given the volatility of stock market performance, which can significantly affect Defined Contribution Pensions.

However, defined benefit schemes offer less flexibility than Defined Contribution Schemes. If you wish to retire early, your pension may be reduced. It’s also important to remember that while the Pension Protection Fund provides some security if your employer doesn’t fulfil their commitments, it may not cover your full pension benefits.

A financial adviser can help you with understanding the implications of taking your pension benefits earlier on, as well as offering support with other decisions surrounding your pension and retirement.

Career Average Schemes vs Final Salary Pensions

Career average pension schemes calculate your pension based on your average earnings over your whole career. This can benefit employees whose pay is irregular or rises gradually.

This opposes a final salary pension scheme, where the rate is based on a percentage of your final salary and received in the form of an accrual rate.

In a career average scheme, each year you earn a fraction of your salary. This is updated each year to keep up inflation. At the end of your career, all of these fractions are added to provide your annual pension. This methodology ensures that all years of your career contribute to your pension. Unlike in a final salary scheme, it is not just the final part. 

Although career average schemes are becoming more common, especially in the public sector, they are not as generous as final salary schemes. However, they are typically more generous than defined contribution schemes, where your pension depends on investment returns and includes a lot of risk.

Workplace Pensions and Retirement

Workplace pensions are a useful tool for saving for after you retire. In the UK, workplace pension schemes are mandatory for employers to provide by law. This can be a DBS or a defined contribution scheme. Therefore, the employee, employer, and government all contribute to your pension pot.

In a DB scheme, the employer commits to a certain pension, whilst bearing the investment risk. This produces a pension which is based on your salary and how long you’ve been a member of the scheme. Contrastingly, a defined contribution scheme means that your pension depends on how much is paid in and how well the investment performs, with the employee holding this risk.

The State Pension is another important part of retirement income in the UK. This is a regular payment from the government which you can claim after reaching the State Pension age of 66. 

However, it is important to remember that this will most likely increase in the future. Your State Pension is based on your National Insurance record, meaning that you will need at least 10 qualifying years on your National Insurance record to receive any State Pension.

You can delay taking this State Pension until later in life, which could increase the payments once you start to withdraw them. However, when deciding this, it’s important to consider your overall retirement income, adding in any workplace or personal pensions to understand your financial situation more clearly.

Public Sector Pensions in Focus

Public Sector Pensions are usually defined benefit schemes or career average schemes, which provide a guaranteed pension income based on your salary and how long you’ve been a member of the scheme. The employer or government then bears the investment risk.

Public sector pensions often provide a higher and more generous income in retirement than many private sector schemes. 

They also offer the plus side of a tax-free lump sum at the beginning of retirement, often providing for spouse’s pensions or other valuable benefits on your death. Protections are also in place by legislation to protect members’ benefits. Although this makes them more secure, the rules around when you can take your pension and how much you’ll receive can be complex, and not without risk.


Although public sector pensions have recently come under criticism due to their rising cost, they remain a key part of the remuneration package for public sector workers. And with the recent shift away from defined benefit pensions in the private sector, public sector pensions are increasingly seen as a benefit of public sector employment.

Frequently Asked Questions

1. What is a DB Pension Scheme and how does it work?

A DB (Defined Benefit) Pension Scheme, involves the received retirement benefits being defined in advance. Therefore, with a defined benefit, you are aware of the amount you’re going to get in retirement based on a formula. This takes into account your salary and how long you’ve been a member of the scheme.

2. What are the benefits of a Career Average Pension Scheme?

A Career Average Pension Scheme is a type of Defined Benefit (DB) Pension which calculates your pension based on your average salary over your entire career. This is protected by the employer who bears all the investment risk, as with all DBSs.

This contrasts to a final salary scheme, where your pension is based on your salary at retirement.

One of the main pros of this scheme is that every year of your career contributes to your pension, not just the final years. This is particularly beneficial for employees whose earnings fluctuate or increase more slowly over their career. 

3. Can I take a tax-free lump sum from my DB Pension?

Yes, DB Pension Schemes allow scheme members to take 25% tax relief when you retire. The pension scheme’s rules vary between different pension schemes, so it’s vital to check the details of your personal scheme.

Taking a tax-free lump sum can provide a higher income in retirement, allowing you to pay off debts, make home improvements, or perhaps go on a dream holiday. However, taking a lump sum at the start of your retirement will reduce the regular pension income which you receive later on, so it’s important to consider your financial needs carefully. Therefore, you may wish to consult regulated financial advice to help make this clear to you.

4. Are all DB Pensions the same?

No, not all DB Pensions are the same. The two main types of DB Pensions are final salary schemes and career average schemes. In a final salary scheme, your pension is usually based on your salary when you retire or leave the scheme. In a career average scheme, your pension is calculated as your average salary over your entire career.

Furthermore, each defined benefit scheme has its own rules over things such as when you can retire, how much you and your employer contribute, and what benefits are available to your spouse or dependants in the event of your death. Although all DB Pensions work in a similar way, the different specifics can vary between schemes.

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db pension

Defined benefit pensions – What are they and how do they work?

A defined benefit pension scheme is a type of pension where the amount of money you receive is dependent on the number of years you have worked and the total salary you have earned throughout your working life with an employer. In this article, we will answer some important questions that you may have about defined benefit pension schemes and the terms and conditions associated with them. The main themes in this guide will help to explain all issues related to defined benefit pension schemes. In this article, we will cover:
  •         What is a defined benefit pension?
  •         Can I cash in a final salary pension?
  •         What is deferring a pension?
  •         What is the maximum tax-free cash lump sum I can take?

What is a defined benefit pension?

A different form of pension scheme, defined benefit plans offer the scheme member a secure income for life, and this can increase year upon year. They are particularly more commonly used in the public sector, or if you have ever been employed by a large company. Since there is a large responsibility and risk associated to the employer when covering the defined amount owed to their employee, defined benefit plans are intricate, requiring guarantees and actuarial projections. As a result, defined benefit pension plans are becoming increasingly less common and are now relatively superseded by defined contribution pension plans. Your pension income is dependent on numerous factors, and these can influence how much you are eligible to receive. These include:
  •         The pensionable service, which is the total number of years you have been a member of the defined benefit plan.
  •         Your pensionable earnings, which could be your salary at retirement, also known as your final salary, your salary averaged over your career, also known as the career average, or another deciding formula.
  •         Finally, the accrual rate is calculated, and this is the proportion of the total earnings that you will receive a pension for each year you are entered in the scheme. Typically, the accrual rate will be 1/60th or 1/80th of your final salary.
This YouTube video provides a brief overview of defined benefit pension plans and what to expect from them. If you do have a final salary scheme you do need to be careful.  You can read our guide on how to avoid pension scams here. 

What is the difference between a defined contribution scheme and a defined benefit scheme?

In a defined contribution (DC) pension scheme, the value of the pension sum available to you upon retirement is dependent on how much you have paid into the scheme, along with how well your investments have performed. This differs from the defined benefit scheme. While the defined benefit pension plan serves to provide a specific, planned payment into your retirement, a defined contribution pension plan would allow both employer and employee to contribute funds over a period of time. In summary, the main differences determine who out of employer or employee, face risk on their investment.  

Calculating your pension income

Calculating your pension income is very simple, and only requires 3 steps. A pension calculator can work out your income using the following factors:
  •         Number of years in the scheme
  •         Divided by the agreed accrual rate
  •         And then multiplied by your pensionable earnings
You can get an idea of how much pension income you may be entitled to by checking your most recent pension statement, and if you haven’t yet received one of these, simply ask your pension administrator to send your latest copy. These pension statements can provide up to date information about your pension based on current salary, time spent in the scheme and what your final pension may be should you remain in the scheme until the normal age of retirement – which is typically 65 years old. final salary pension lump sum

When can I take my final salary pension?

You will find that most db pension schemes have a normal retirement age of 65 years old, and this is the time when your employer will cease from paying into your pension and the pension can begin to be paid to you as an income. However, the age at which you can receive your pension can vary between schemes. For instance, in some schemes, you may be eligible to receive your pension at the age of 55, although this may affect the amount of pension you are entitled to receive. There are several other options available to you other than taking your pension at the normal retirement age or earlier. For instance, it may be possible to begin receiving a pension income without yet retiring, or you may choose to defer your pension which could increase the amount you receive when you do take it. Once the pension is first paid, its value can increase each year by a set amount.  

What is deferring your pension?

If you do not wish to begin receiving a pension income at the normal retirement age, you may be able to defer your pension payments, which can make them more higher in the future. A deferred pension is simply, therefore, a delayed pension that you can take later in life. By delaying the process of accessing and using your savings, your potential retirement-income can increase significantly. final salary pension scheme

Can I cash in a final salary pension lump sum?

Should you choose to cash in on your final salary pension scheme then you have to ensure you request a CETV from your pension scheme. A CETV, also known as a cash equivalent transfer value, is the overall cash value that is placed on your pension savings. There are several factors that will determine how much this value actually is, and a complex calculation is undertaken to arrive at the figure.

Do you need pension advice when cashing in your final salary pension scheme?

If your final salary transfer is worth more than £30,000, you need to seek financial advice from a professional financial advisor. By seeking their advice, you can understand the potential risks to your investment before committing to a final decision.

What is the maximum tax-free cash lump sum I can take?

When you wish to withdraw benefits from your defined pension scheme, you are entitled to receive some of those benefits in the form of a tax-free lump sum. After you begin drawing benefits from your pension scheme, you may be able to take either a fraction or the whole of your pension benefits as a tax-free cash lump sum. This is often known as the pension commencement lump sum (PCLS). Depending on the rules of your defined pension scheme provider, the amount of tax-free cash lump sum available to you can vary. However, if you are a member of a defined contribution pension scheme, you will typically be given the option to take up to 25% of your pension pot’s value. In addition, you may be entitled to take more than 25% as a tax-free lump sum. This may be allowed if you have applied to either one of HMRC’s scheme specific lump sum protection, enhanced protection, and fixed protection or primary protection options, although terms and conditions can vary between these. Any sum withdrawn that is in excess of the PCLS is liable to be taxed as income, making it subject to income tax rates.

How can you protect your pension fund in a defined benefit scheme?

Although your employer is responsible for ensuring there Is enough money in the scheme, in some instances your company may find themselves unable to reach its commitments due to unforeseen financial difficulty. If this does occur, the pension protection fund (PPF) can provide insurance for your pension savings upon retirement, although you may be entitled to a lower amount than the sum promised by your employer. The PPF is sponsored by the government and acts to pay compensation to those whose employer cannot meet their pension commitments to their employees. If this does happen, providing some criteria are met, the PPF can pay your pension. If the criteria are met, then the PPF is able to pay up to 90% of the benefits expected to those below retirement age. If you are above retirement age, receiving ill-health or early retirement pension benefits or due to receive a survivors pension, you are likely to qualify for full compensation. pension calculator

What are the advantages and disadvantages related to defined benefit plans?

  •         You can simply continue to work, with the security that your employer is paying into your pension savings, and that these savings will be sufficient to support you in your retirement. The employer is taking all the risk in providing you with a guaranteed income in retirement
  •         This can help with future budgeting after retirement, and your spouse or other beneficiaries can continue to receive benefits after your death
  •         Most defined benefit pension schemes pay their benefits in the form similar to that of a pension annuity, which lowers the risk associated with low investment returns on any investments in the scheme.
This BBC article highlights how the value of db pension transfer values are on the rise, while this article questions the generosity of pension transfers. Disadvantages:
  •         You have no choice in how your money is invested, as well as having no choice to invest more money in your plan. Your employer takes all the investment risk.
  •         While it is comforting to know what you are going to receive as a pay- out following your retirement, some plans are restricted in the sense that they may not fully increase in value along with inflation rates.
  •         A defined benefit pension scheme is often less portable than a defined contribution plan, despite the fact the former allows a lump sum payment upon termination

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