Defined benefit pensions, often called final salary pensions, offer a guaranteed income in retirement based on your salary and the number of years you’ve worked. Unlike defined contribution schemes, where your retirement income depends on investment performance, defined benefit (DB) pensions promise a fixed payout, no matter how markets behave. They used to be the standard for both public and private sector jobs, but rising costs have made them rare outside government, the NHS, education, and a few large legacy employers.
For those still entitled to them, they remain one of the most reliable ways to fund retirement. But because of their long-term cost and complexity, they are being phased out in most of the private sector. Understanding how they work — and what to do with one if you have it — is important, especially if you’re considering early retirement, transferring, or relying heavily on this type of pension.
How defined benefit pensions work
A DB pension pays you a regular income for life, starting from retirement age, based on a set formula. That formula usually includes:
- Final salary or career-average salary (depending on the scheme)
- Accrual rate — typically expressed as a fraction, such as 1/60th or 1/80th
- Years of service in the scheme
So, if your scheme pays 1/60th of your final salary for every year worked, and you retire after 30 years with a final salary of £40,000, your annual pension would be 30/60 × £40,000 = £20,000 per year. This income is usually indexed, meaning it increases each year in line with inflation or a capped rate.
Some schemes allow you to take a tax-free lump sum on retirement in exchange for a lower annual pension. Others provide automatic lump sums in addition to the income. Survivor benefits may also be included, paying a portion of the pension to a spouse or dependent after your death.
Public vs private sector
Defined benefit pensions are still widely used in the public sector — NHS, civil service, police, teaching, local government — and are funded differently from private schemes. These public sector pensions are often “unfunded,” meaning they are paid from current government income rather than investment funds. They are backed by the state and considered secure.
In the private sector, DB schemes are usually funded, meaning the employer sets aside money in a separate pension fund, which is invested to meet future obligations. Because investment returns have been unpredictable and people are living longer, many private DB schemes have closed to new members or stopped accruing new benefits.
Transferring out of a defined benefit pension
It is possible to transfer your DB pension to a defined contribution (DC) pension like a SIPP — but this is heavily regulated and only allowed under strict conditions. The value you’d receive in return is called the Cash Equivalent Transfer Value (CETV), and it can be substantial, especially when interest rates are low.
However, transferring means giving up a guaranteed income and taking on investment risk. The regulator generally advises against it unless you have exceptional reasons — such as serious health issues, very short life expectancy, or specific estate planning goals. If your CETV is over £30,000, you must receive independent financial advice from a qualified adviser.
Transfers became more common when CETVs rose dramatically due to low interest rates, but many people underestimated the risk. Once transferred, you’re responsible for managing the money — and if investments underperform or you withdraw too quickly, your pension can run out.
Pros and cons
Advantages:
- Guaranteed income for life
- Protection against inflation (depending on scheme rules)
- Often includes spousal or dependent benefits
- No involvement in investment decisions
- Less exposure to market risk
Disadvantages:
- Lack of flexibility in income or lump sums
- Not usually inheritable beyond spouse or dependents
- Inaccessible before retirement age without penalty
- Transfer value often doesn’t reflect the long-term security you’re giving up
- Rarely offered to new employees
Tax treatment
Income from a DB pension is taxable, just like any other pension income. You can usually take up to 25% of the value as a tax-free lump sum, though this varies by scheme and needs to be calculated carefully. The remainder is taxed at your marginal rate. If you have other sources of income in retirement, you may want to plan withdrawals carefully to avoid moving into a higher tax band.
Impact on retirement planning
DB pensions are valuable because they reduce uncertainty. If you know you’ll receive £15,000 or £20,000 per year guaranteed, you don’t need to build up as much in other savings to meet basic needs. It can make planning easier and reduce reliance on investment-based pensions, which carry more risk and require ongoing decisions.
However, people with DB pensions still need to think about tax, health costs, and what happens if they retire early or take on part-time work. Some DB schemes penalise early retirement with reduced payouts, while others offer flexible retirement ages.
Seen from Pension Gruber
Guests who arrive with a defined benefit pension usually have fewer concerns about budgeting. They know what’s coming in, every month, for the rest of their lives. Some retired teachers and NHS staff stay longer, take more trips, or plan further ahead — not because they earned more, but because their retirement income is fixed and stable.
We’ve also spoken to a few guests who transferred their DB pensions in hopes of bigger growth and flexibility. Some did well, others regretted it. They swapped certainty for control, and the outcome depended on timing, investment returns, and how much attention they paid. Most say they underestimated the stress of managing the money themselves.
If you have a defined benefit pension, it’s one of the most stable assets you’ll ever own. Whether you keep it or move it, know exactly what you’re giving up — and what you’re getting in return.
