What is a defined benefit pension?
A defined benefit pension (also called a ‘final salary’ pension) is a type of workplace pension that pays you a retirement income based on your salary and the number of years you’ve worked for the employer, rather than the amount of money you’ve contributed to the pension.
Defined contribution vs. defined benefit pensions
- How long you’ve worked for the company
- Your salary while working: sometimes your final salary, or sometimes an average of your salary over your career
- The accrual rate: the proportion of your salary you’ll get as an annual retirement income
Your employer is responsible for making sure there’s enough money in the scheme to pay you when you reach retirement. If your company gets into financial difficulty and can’t meet its pension commitments, the Pension Protection Fund (PPF) can cover your pension income, but you may receive a lower amount than you were promised by your employer.
Defined benefit pensions are increasingly rare, but you may have one if you’ve worked for a large company or a public sector organisation.
Moving a defined benefit pension
Private sector defined benefit pensions (and some public sector pensions) are funded, which means you can get a cash value for your pension and transfer this amount to another provider.
However, it’s important to understand that you’ll lose the retirement income promised by your employer. Instead, your pension money will be invested into a defined contribution plan, and the amount it’s worth on retirement will be based on how much you’ve contributed and how the investments have performed.
If you have a defined benefit pension that’s worth over £30,000, you have to consult with an independent financial adviser (IFA) before moving your pension.
If you’re in an ‘unfunded’ public sector pension scheme (for example an NHS pension, a teacher pension or a civil service pension), you won’t be able to move your pension. That’s because this type of pension uses the employer’s current income to pay pension benefits, rather than setting assets aside.
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Updated: 4th April 2020
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