A defined benefit (DB) pension is a type of workplace pension which guarantees you a specific income for life (throughout retirement). The amount it pays out depends on things like your final or average salary and how long you’ve been a member of your employer's scheme. It doesn’t depend on how much money you or your employer pays in or how that money performs in financial markets— that’s the main difference between defined benefit and defined contribution schemes.
Note that defined benefit pensions are sometimes called final salary pensions— pensions whose income is based on your salary at or near retirement. But defined benefit pensions can also be career average pensions, whose income is based on your average salary across your career.
Defined benefit pensions are more common in the public sector. They’re becoming less common overall as defined contribution pensions increase in popularity.
Learn more about the difference between defined benefit and defined contribution schemes.
What are the advantages of a defined benefit pension?
The biggest advantage of a defined benefit pension is the security it gives you. Planning for retirement is often easier with a guaranteed income that isn’t pushed around by changes in the market. Another potential plus is that defined benefit schemes tend to be managed by a board of trustees, meaning you won’t face any tough decisions about where to invest your retirement savings.
What are the disadvantages of a defined benefit pension?
Defined benefit pensions do have some downsides, with their main drawback being a lack of flexibility. The income from a defined benefit scheme rises with inflation (general price increases over time) but is otherwise fixed by the rules of the scheme. That can make it harder to address any changes to your financial needs or goals.
The death benefits from Defined Benefit pension schemes are also restricted. They are often a lump sum and/or an income for your spouse or other dependant. Please check with your scheme/trustees what death benefits your Defined Benefits scheme provides. It is not possible for Defined Benefit pensions to create an amount which can be passed between generations if left unused at the previous holder's death, as can happen with flexi-access drawdown from money purchase (also known as defined contribution) schemes.
Can I take my defined benefit pension as a lump sum?
Like defined contribution pensions, defined benefit schemes let you take out up to 25% of their total value as a tax-free lump sum at age 55. Schemes differ in how they reduce your remaining income to adjust for the amount you’ve taken out.
If the value of your defined benefit pension is less than £30,000, you might be able to take it all out in one go (a process known as taking a ‘trivial lump sum’ or ‘trivial communication’). The government-backed MoneyHelper website has more detail about taking your defined benefit pension as a lump sum.
Please speak to your pension scheme/trustees if you would like to understand more about what might be available to you, either to transfer now or when you come to take benefits.
Can I transfer my defined benefit pension to another pension scheme?
You won’t be able to transfer from a defined benefit to a defined contribution scheme if:
- you’re already taking money from the pension
- you have a Teachers', Civil Servant, or NHS pension
If the above points don’t apply, then you might be able to transfer your pension. However, leaving the security of a defined benefit scheme is a big and potentially risky decision. In fact, the Financial Conduct Authority (FCA) and the Pensions Regulator (TPR) both say that most people will have better financial outcomes if they stay with their defined benefit scheme. Because of the risks, it’s best to get financial advice before transferring. And if your pension is worth over £30,000, you’re legally required to get advice which would incur a charge.
If you are unsure of your options, or if you need some defined benefit pension advice, Aviva Financial Advice can help.
