Defined benefit (or final salary) pensions

What is a defined benefit pension?

A defined benefit pension scheme - also known as a final salary or career average pension scheme - is one that promises to pay out an income in retirement based on how much you earned when you were working.

Unlike defined contribution pensions - which are the most common type of workplace pension - the amount you'll get at retirement is guaranteed, and will rise each year in line with inflation.

Defined benefit pensions have historically been provided by companies in both the private and public sector, although they are now far less common in the private sector.

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What are the different types of final salary pension?

If you've saved into a final salary pension scheme, your contributions, along with those made by your employer and the tax relief you receive from the government, have been invested in the stock market over your working years.

But the income you ultimately receive is a guaranteed, pre-agreed amount. This is why they are called 'defined benefit' pensions. There are two main types:

• Final salary schemes: the amount paid out is based on how much you're paid when you finally retire
• Career average schemes: the amount paid out is based on an average of your salary across your career

Both types provide valuable benefits, which include:

• annual increases to payments in line with inflation
• death-in-service payments to spouses, partners or dependants if you die before reaching pensionable age
• full pension if you have to retire early through ill health

How do I work out my final salary pension income?

If you've saved into a final salary pension scheme during your career, it will provide you an income for your retirement based on three key factors:

• the number of years you have paid into the scheme
• your salary - this might be your final salary when you retire or your average salary across your career 
• your pension scheme's 'accrual rate', which is a fraction of your salary (usually 1/60th or 1/80th)

So if your final salary when you retire is £30,000, you've worked at your company for 40 years, and your company uses an accrual rate of 1/60th, your annual pension would be £20,000: ie 1/60th of £30,000 x 40.

Use our final salary pension calculator

Can I take a lump sum from a final salary pension?

When you retire, you can take 25% of your savings as a tax-free lump sum.

With final salary pensions, the way this is calculated is complicated. It's based on the scheme's 'commutation factor', which represents how much of a lump sum you get for every £1 you give up in income.

So if you have a commutation factor of 12, you get £12 of lump sum for every £1 you give up.

You will need to contact your pension scheme to find out how much you could get from your final salary pension as a lump sum.

Can I cash in or transfer my final salary pension?

If you’re part of a private defined benefit pension scheme but aren’t yet receiving your benefits, you have the option to transfer into a defined contribution pension. 

However, giving up a final salary pension and the guaranteed lifetime income it provides is a big decision – and one that the Financial Conduct Authority believes is generally not in a pension scheme member’s best interests. 

This is why the law requires you to take advice if you’re offered a transfer value of more than £30,000. 

Not everyone can transfer. If you’re already receiving payments from a defined scheme, you won’t be able to switch to a defined contribution scheme. 

The same applies to those in unfunded public sector defined benefit pensions, such as those for the NHS, teachers, the armed forces, the civil service, police and fire service.

What happens to my pension if my company goes bust?

There is a safety net to make sure you'll still get a pension in this scenario. 

This is called the Pension Protection Fund (PPF).

More FAQs about final salary pensions