3.3 Defined Benefit Pension

3.3 Defined Benefit (DB) Pensions at Retirement

If you’ve built up a Defined Benefit pension — often called a final salary or career average scheme — it will typically pay you a guaranteed income for life. But there are still important decisions to make at retirement.

What Is a Defined Benefit Pension?

A Defined Benefit (DB) pension promises a pre-determined annual income at retirement, based on:

• Your salary (final or career average)
• Your years of service
• The scheme’s accrual rate (e.g. 1/60th or 1/80th)

You don’t need to manage investments — the scheme takes responsibility for funding the promised benefits.

How Is Your Pension Calculated?

Here’s a typical formula:

Annual pension = Final salary × Years of service × Accrual rate

Example:

• Final salary = £48,000
• Service = 25 years
• Accrual rate = 1/60th
• Pension = £48,000 × 25 ÷ 60 = £20,000 per year

Do You Get a Lump Sum?

Yes — most DB schemes allow you to commute part of your pension into a tax-free lump sum.

• The default is often no lump sum unless you choose to reduce your annual pension
• Commutation rate is typically £12–£20 per £1 of pension given up

Example:

• Full pension = £20,000
• You take £60,000 lump sum
• Pension reduces to ~£17,000 depending on the scheme

⚠️ The maximum lump sum is usually capped at 25% of the calculated value, and subject to the post-LTA Lump Sum Allowance (typically £268,275)

Is the Pension Income Inflation-Protected?

Usually, yes — most DB schemes increase your pension annually in line with:

• CPI or RPI inflation, capped (e.g. 2.5% or 5%)
• Some public sector schemes offer full inflation linking

This helps protect the value of your income in retirement.

‍‍Is There a Spouse’s Pension?

Yes — DB schemes typically include a survivor’s pension:

• Often 50% or 2/3 of your pension
• Paid to a spouse or civil partner after your death
• Some schemes offer dependent children’s benefits too

Reducing your pension at retirement (for higher lump sum or early access) also reduces the spouse’s pension.

What Age Can You Take a DB Pension?

Most DB schemes have a Normal Retirement Age — usually 60 or 65.

• You can often take it early, but your pension will be reduced for each year taken early (e.g. 4–6% per year)
• You may also be able to defer for a larger pension

Each scheme has different actuarial factors — check your provider’s retirement options.

Can You Transfer a DB Pension?

Yes — but only before you’ve started drawing it.

• You can transfer your DB pension into a Defined Contribution (DC) scheme, such as a SIPP
• This gives flexibility (drawdown, lump sums), but you give up the guaranteed income

Key Rules:

• Advice is mandatory if the transfer value is over £30,000
• Transfers are not allowed once you’ve started taking income

⚠️ FCA and regulators warn that DB transfers are often unsuitable for most people.

When Might a Transfer Be Worth Considering?

Transferring may be worth exploring if:

• You have no dependants and want to maximise access
• You have reduced life expectancy
• You want to pass the pension on tax-free
• You have significant other income/assets

Most people are better off keeping a DB pension — but regulated advice is essential.

Summary Table: DB Pension at Retirement

Next Chapter Preview:

We’ll explore the 25% tax-free lump sum in more depth — how it works in both DC and DB schemes, and how to use it tax-efficiently.

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