Defined benefit pensions

A defined benefit pension scheme is a type of workplace pension that gives you a guaranteed income for life. They include ‘final salary’ and ‘career average’ pension schemes. Historically this has made them popular with employees because they provide a guaranteed income for life.

Can I still join a defined benefit pension scheme?

Today new employees are not usually offered access to defined benefit schemes because they are too expensive to operate for many private sector employers. This type of scheme is most common among public sector and government employers, including teachers, NHS workers, police officers and firefighters.

How much can I expect to receive from a defined benefit pension?

The size of the pension will typically depend on factors including the number of years you have worked for your employer and your final salary when you stop work, or your salary averaged over a period defined in the scheme rules. You receive a set amount each year and this amount will also increase each year. The amount it increases will be set by the scheme rules and in periods of high inflation it may not maintain its purchasing power.

It is your employer that bears responsibility for funding the scheme, and this may mean you are contractually obliged to make contributions too.

The pension scheme will have an ‘accrual rate’ which will determine the actual retirement income. This is essentially a fraction of your final or average salary, typically 1/80 or 1/60, which is then multiplied by the number of years you have belonged to the scheme.

Can I transfer my defined benefit pension?

It may be possible to transfer out of a defined benefit pension into a personal pension (money purchase pension).

Obtaining professional financial advice about your pension is mandatory and governed by legislation set by the Financial Conduct Authority. The advice process must start from the opinion that a defined benefit transfer is not suitable unless it can be unequivocally proved otherwise. You cannot change your mind once it is complete and you are essentially giving up a guaranteed stable income that is protected from inflation in return for a cash lump sum.

Advice on defined benefit pension transfers is a specialist service and one that Path Financial do not offer. We can however put you in contact with a specialist firm to work in tandem with Path and yourself.

What happens to my defined benefit pension when I die?

When you die the scheme rules will define who is classed as a dependent. This type of scheme is usually much stricter on who may receive a death benefits payment compared to a personal pension.

If you pass away before retirement from a defined benefit scheme, the trustees will usually pay a reduced pension to your spouse, registered civil partner or other dependent.

Children’s pensions may also sometimes be offered, if your children are still in full time education or university but cease once your children are no longer in education.

If you have already retired when you die, the scheme will usually continue paying a reduced pension to your spouse, registered civil partner or other dependent.

But this will depend on the scheme rules, and not every defined benefit scheme will have the same provision.