Defined Benefit Pensions

A defined benefit pension is a workplace scheme that provides a guaranteed income in retirement, based on:

• Your salary: This could be your final salary, an average over your career (career average scheme), or another agreed amount.
• Years of service: The longer you work for the employer, the higher your pension will be.
• Accrual rate: This determines how much of your salary you’ll receive for each year of service, e.g., 1/60th or 1/80th.
• Boost growth potential: Combining smaller pots into one larger fund can give you access to better investment opportunities and reduce cash drag (uninvited funds losing value over time).

Unlike defined contribution (DC) pensions, DB pensions don’t depend on investment performance. Instead, your employer or pension provider promises to pay you a fixed amount for life.

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DB pensions provide a predictable, inflation-proof income for life, ensuring you can cover your essential costs in retirement.

Most schemes include annual increases linked to inflation, ensuring your purchasing power isn’t eroded over time.

Employers typically contribute significantly to these schemes, making them highly valuable compared to personal or workplace DC pensions.

Defined benefit schemes often include benefits for your spouse or dependents, ensuring financial security for your loved ones if you pass away.

Since your retirement income is guaranteed, you don’t bear the investment risk, unlike defined contribution pensions.

For most people, the safest option is to remain in the defined benefit scheme. The guaranteed income and inflation protection make these pensions difficult to match through alternative investments.

In some circumstances, transferring your DB pension to a defined contribution scheme might make sense, such as:

• If you want greater flexibility over how you access your retirement savings.
• If you don’t have dependents and won’t need spousal or survivor benefits.
• If the transfer value offered by your scheme is exceptionally high, making it possible to generate a comparable income elsewhere.

Important: Transferring out of a defined benefit scheme is a complex decision and requires independent financial advice for transfer values over £30,000.. Click here to book a complimentary session with a regulated financial adviser.

Transferring out means losing the lifetime guaranteed income provided by your DB scheme. Any alternative investment will carry more risk.

The transfer value (Cash Equivalent Transfer Value or CETV) represents the lump sum offered in exchange for giving up your guaranteed benefits. This amount can vary significantly and is usually higher in low-interest-rate environments.

While transferring offers flexibility (e.g., lump sums or drawdown), it also introduces uncertainty, as your retirement income will depend on investment performance and withdrawal strategy.

Transferring a DB pension into a defined contribution scheme can lead to tax implications, particularly if the funds exceed your Lifetime Allowance (LTA abolished in 2024/25 but still relevant under transitional protections).

Transferring a defined benefit pension is typically only suitable for specific circumstances, such as:

• You have other guaranteed income sources, such as another DB pension or significant State Pension entitlements.
• You want to pass more of your pension wealth to beneficiaries.
• You’re comfortable with the risks associated with managing your pension independently.

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