Pensions & retirement

Defined benefit pensions explained

Q: What are the differences between a defined benefit (DB) and a defined contribution (DC) pension scheme?

Defined benefit pensions provide a guaranteed income for life, while a defined contribution pension builds a fund that can be used at retirement to provide an income. With a DC pension, you can choose how to take your retirement income flexibly. For example, drawdown allows you the freedom to withdraw more or less money each month. The two types of pension scheme also have different rules about inheritance. Any remaining money in a DC pension can be passed on to whoever you wish to nominate as a beneficiary. DB pensions usually only provide money for your spouse, civil partner or a dependent.

Q: Can I take a defined benefit pension scheme early?

You may be able take a final scheme early if its rules allow you to. Most final salary schemes have a standard retirement age of 60 or 65. Some may allow earlier retirement. However, it is likely that early retirement will be subject to a significant reduction in your annual income. Your scheme may have separate rules for early retirement due to ill health.

Q: What happens to my defined benefit pension when I die?

Each defined benefit pension scheme has its own rules about how your pension can be inherited. Unlike defined contribution pensions, a defined benefit pension is not an individual pot of money. This means it cannot be passed on to a nominated beneficiary when you die. Most schemes will continue to pay out to your spouse, civil partner or dependant. It depends on the rules of the scheme, but it is likely that it will pay out at a reduced rate of about 50%. Each scheme has its own rules about who can inherit your pension when you die and how much they can receive.

Q: What happens to my defined benefit pension if my company goes bust?

If your pension scheme goes bust, you are protected by the Pension Protection Fund (PPF). If you are over 65, you will receive 100% of your pension up to £41,461. If you are under 65, you are still guaranteed to have the majority of your pension protected by the PPF.

Defined benefits pay a guaranteed annual income in retirement, based on your earnings.

What is a defined benefit (final salary) pension?

What is a defined benefit (final salary) pension? Defined benefit (DB) pensions pay out a guaranteed income when you retire. This is often based on your final salary at retirement. These days ‘career average’ pensions are more common, which pay out based on your average salary while in that scheme.

Unlike defined contribution pension schemes, a DB pension guarantees to continue paying you an annual income for life.

Although you still need to make personal contributions to a DB pension, the annual pension income you receive is not based on how much you have paid in. Instead, it is based on your earnings and how long you’ve worked for your employer.

As they are guaranteed for as long as you live, DB pension schemes can provide more security. However, few employers still offer them to new employees.

Can I take a lump sum from my defined benefit pension?

You can take a tax-free lump sum from your defined benefit pension scheme. The amount you can receive is determined by the rules of your scheme. Some schemes offer a cash lump sum separately from your pension income.

However, you may need to trade some of your annual income in exchange for your lump sum. Contact your pension provider if you wish to find out how much you could take as a lump sum.

Is my defined benefit pension taxable?

Like other forms of pension, income from your final salary pension is taxable.

Alongside your state pension and any other forms of income, your defined benefit pension is subject to income tax at the same rate as other earnings.

Currently (2024/25), you can earn up to £12,570 tax-free. Anything over £12,570 and up to £50,270 is taxed at 20%. Earnings between £50,270 and £125,140 are subject to 40% higher-rate income tax. Anything over £125,140 is taxed at 45%.

Can I transfer my final salary pension?

You can transfer your final salary pension to another scheme. However, you may lose valuable benefits by taking this option – meaning it may not be in your best interest.

If you decide to transfer your final salary pension, the amount it is worth is known as the ‘cash equivalent transfer value’.

By transferring, you lose the guarantee of having an income for life. Although this may provide you with a substantial transfer value, this may not be enough to provide a sustainable income in retirement.

For these reasons, you are legally required to seek financial advice if you wish to transfer a final salary pension worth £30,000 or more. You will need a suitably qualified advisor to confirm it is in your best financial interest before you can transfer.

Defined benefit pension FAQs

What are the differences between a defined benefit (DB) and a defined contribution (DC) pension scheme?

Can I take a defined benefit pension scheme early?

What happens to my defined benefit pension when I die?

What happens to my defined benefit pension if my company goes bust?

The ii SIPP is aimed at clients who have sufficient knowledge and experience of investing to make their own investment decisions and want to actively manage their investments. A SIPP is not suitable for every investor. Other types of pensions may be more appropriate. The value of investments made within a SIPP can fall as well as rise and you may end up with a fund at retirement that’s worth less than you invested. You can normally only access the money from age 55 (age 57 from 2028). Prior to making any decision about the suitability of a SIPP, or transferring any existing pension plan(s) into a SIPP we recommend that you seek the advice of a suitably qualified financial adviser. Please note the tax treatment of these products depends on the individual circumstances of each customer and may be subject to change in future.