Defined benefit pensions

A defined benefit pension is a workplace scheme that promises a guaranteed income in retirement, calculated from three things:

• Your salary — either your final salary, an average across your career in a career average scheme, or another agreed measure.
• Your years of service — the longer you were a member, the larger the pension.
• The accrual rate — how much of your salary you earn for each year of service, commonly 1/60th or 1/80th.

Unlike a defined contribution pension, the amount you receive does not depend on investment performance. Your employer or the scheme carries that risk and promises to pay you a set amount for life.

See how the guarantee fits your plan

Our free retirement calculator lets you model your total retirement income, including a guaranteed defined benefit pension alongside other savings.

Guaranteed income for life. A predictable income that cannot run out, however long you live and whatever markets do. Nothing in the defined contribution world replicates that certainty.

Inflation protection. Most schemes increase payments annually in line with an inflation measure, so your purchasing power is largely preserved over a long retirement.

Substantial employer funding. Employers typically contribute far more to these schemes than to defined contribution alternatives, which is a large part of why they have mostly been closed to new members.

Benefits for your family. Most schemes pay a spouse’s or dependant’s pension after your death, often around half the member’s pension, continuing for life.

No investment risk to you. Because the income is promised, you do not bear the risk of markets falling shortly before or during retirement — the single largest danger in a drawdown plan.

For the large majority of members, the safest option is to stay in the scheme. The guaranteed, inflation-linked income and the survivor’s benefits are genuinely difficult to match through any alternative investment.

In a minority of situations a transfer to a defined contribution scheme may be worth exploring:

• You want substantially more flexibility over when and how you draw your retirement savings.
• You have no spouse or dependants, so the survivor benefits have limited value to you.
• You are in poor health, where a guaranteed lifetime income may be worth less to you than a transferable fund.
• The transfer value offered is exceptionally high relative to the benefits given up.
• Estate planning is a priority — though note that from April 2027 most unused pension funds are expected to fall within the inheritance tax estate, which changes this argument.

Transferring out of a defined benefit scheme requires independent regulated advice where the transfer value exceeds £30,000, and the regulatory starting position is that a transfer is unlikely to be in your interests unless it can be clearly demonstrated otherwise.

The Cash Equivalent Transfer Value, or CETV, is the lump sum your scheme will pay in exchange for giving up your guaranteed benefits entirely. Three things about it are worth understanding:

• It varies substantially with interest rates — CETVs were far higher in the low-rate era and have fallen considerably as gilt yields rose.
• A large-sounding figure is not the same as a good one. The question is whether that sum, invested and drawn down, could reliably produce the same inflation-linked income for as long as you live, plus a survivor’s pension.
• The value is quoted for a limited period, typically three months, after which a new calculation is required.

Transferring means permanently giving up the lifetime guarantee. Any alternative carries investment risk, sequencing risk and the risk of living longer than your money lasts — and the decision cannot be reversed.

• Check your scheme’s normal retirement age, and what reduction applies if you draw early.
• Ask about the commutation rate if you want tax-free cash — the rate at which income is exchanged for a lump sum is often poor value.
• Understand how increases are applied, both before and after you start drawing.
• Confirm the spouse’s or dependant’s pension, and that your nominated details are current.
• Factor the guaranteed income into your wider plan — it may mean you can take more investment risk elsewhere, since your essential costs are already covered.