Paul Mitchell | Financial and Retirement Planning Coach
Find him here at: Your Smart Retirement Coach
What is a defined benefit (final salary or career average) pension?
Most people now build retirement savings in defined contribution (DC) pensions. But if you work in the public sector or you’ve spent time with a large or legacy private employer, you might hold a defined benefit (DB)—often called a final salary or career average scheme. DB pensions are frequently dubbed “gold-plated” because they promise a paycheque for life rather than a pot that depends on markets. That promise is hugely valuable—though it also means DB schemes are less flexible, especially around tailoring income and leaving money to non-dependants.
This guide explains, in plain English, what a DB pension is, how it’s calculated, the trade-offs to consider, what happens if your employer fails, how transfers work (and why most people shouldn’t transfer), plus answers to common questions. If you finish this and still want help making sense of your own paperwork, you can book a free 15-minute Zoom discovery call—no sales, no products, just clarity.
Quick disclosure: I’m a financial and retirement coach, not an FCA-regulated adviser. I don’t sell investments or receive ongoing fees, and I cannot advise you to transfer out of a DB scheme. I help you understand your numbers, model “what-ifs,” and prep for a regulated advice meeting if you need one.
Defined Benefit (DB) Schemes Explained..
A DB pension guarantees a specific income for life based on your salary and years of service in the scheme. By contrast, a DC pension gives you a pot whose size depends on contributions and investment performance. With DB, the employer (via the scheme) carries the funding and investment risk, which is why DBs are prized and increasingly rare in the private sector. MaPS
Two common designs:
- Final salary: your pension is based on your pay near retirement/leaving, multiplied by years of service and the scheme’s accrual rate.
- Career average (CARE): each year a slice of your earnings is banked and then revalued with inflation until retirement; all slices are added up at the end. MaPS
How DB pensions are calculated (without the headache)
The simple version:
Annual DB pension = Accrual rate × Years of service × Pensionable salary
- Accrual rates are often 1/60th or 1/80th per year (1/60th is more generous).
- If your “pensionable salary” figure is £50,000 and you have 40 years at 1/60th, that’s 40/60 × £50,000 = £33,333 a year (illustrative).
When you reach the scheme’s normal pension age (NPA)—often around 60–66 depending on the scheme—you start receiving income (taxable, but no National Insurance). Many schemes allow early retirement with a reduction, or late retirement with an uplift. Your scheme booklet/admin team can confirm the exact factors. MaPS
Inflation protection: increases before and after you retire
DB pensions have two important protections against rising prices:
- In payment (“indexation”): post-1997 private-sector DB benefits must rise each year by a measure of inflation, but increases are capped by law (broadly up to 5% per year on rights earned from 1997–2005, and up to 2.5% per year on rights since 2005). Schemes can offer more; pre-1997 rights may have no statutory increase. MaPS
- Before you draw it (“revaluation”): if you’ve left the scheme, your deferred pension must be increased each year until you take it. Broadly, service built up to April 2009 can revalue by up to 5% a year; later service typically up to 2.5% a year. MaPS
Translation: even if you left a DB years ago, the promised income may have climbed substantially due to these legal uplifts.
What happens if the employer fails? (PPF safety net)
If a private-sector employer goes bust and the scheme can’t meet all promised benefits, the Pension Protection Fund (PPF) can take over and pay compensation:
- Generally 100% compensation if you’d already reached the scheme’s normal pension age (or met certain criteria like ill-health retirement).
- Generally 90% compensation if you were below normal pension age at the assessment date. The historic compensation cap has been removed after court rulings. ppf.co.uk+1
Public-service DB schemes are backed by the State rather than the PPF.
Flexibility and death benefits: what DB does (and doesn’t) do
- Income pattern: DB provides a steady, guaranteed income. It’s not designed for large, ad-hoc withdrawals the way DC drawdown is.
- Tax-free lump sum: many DB schemes allow you to commute part of the income to create a tax-free lump sum when you start benefits. Under current HMRC rules, you can usually take up to 25% of your overall pension value tax-free, but the maximum across all pensions is £268,275 (subject to protections). How much cash your DB allows—and how much the income falls—depends on scheme rules and commutation factors. GOV.UK
- Passing on wealth: DB typically pays a survivor’s pension (often around 50%) to a spouse/civil partner or eligible dependants. There isn’t a “pot” to leave outright to adult children or charities, unlike DC. Check your scheme’s rules for exact percentages and eligibility. MaPS
Want to see the real-world impact of taking cash vs income, or retiring two years early? I can map those trade-offs in a one-hour coaching session—no products, no pushy sales.
Transferring a DB pension: why most people shouldn’t (and the strict rules if you explore it)
Transferring means giving up the lifetime, inflation-linked guarantee in exchange for a DC pot you control. That flexibility can be attractive for a small minority (e.g., serious ill-health, no dependants, unusual planning needs). But you take on market risk, longevity risk, and the risk of poor sequencing in withdrawals. The FCA’s starting position is that staying in DB will be right for most people. If your cash equivalent transfer value (CETV) is over £30,000, the law requires regulated advice from a firm with the correct permissions before a transfer can proceed. FCA+1
There are important exceptions and bans:
- Unfunded public-service DB schemes (e.g., NHS, Teachers, Civil Service) are not allowed to transfer to DC schemes (with narrow exceptions). Department of FinanceResearch BriefingsLegislation.gov.uk
- If you’ve already started taking income from a DB, you usually can’t transfer. Aviva
How CETVs move (and why your quote can be a shock):
Your transfer value is the lump sum the scheme calculates to “replace” your guaranteed income using prudent assumptions. It is highly sensitive to long-term gilt yields: when yields rise, the lump sum needed falls—so CETVs drop; when yields fall, CETVs rise. Since the gilt market shock of late-2022, transfer values have generally been much lower than in 2019–2021, with levels into 2025 still reflecting higher rates. Aviva
My role here is coaching only: I help you get your facts straight, tidy your paperwork, and prepare sharp questions so any paid adviser meeting is focused and good value. I won’t steer you to transfer (and legally can’t).
“How to” if you’re exploring a transfer (the compliant route)
- Request a CETV: ask the scheme for a statement of entitlement showing the guaranteed transfer value (usually valid ~3 months) and your accrued benefits.
- Speak to a regulated adviser: if the CETV is over £30,000, regulated DB transfer advice is mandatory. Check the firm on the FCA Register and be alert to scams—never proceed because of an unsolicited approach. FCA
- Only proceed if recommended: trustees and receiving providers will require evidence that full advice (not just “abridged”) has been given and, typically, that the adviser is willing to sign off the transfer. FCA
Advantages and disadvantages of DB pensions (the short version)
Why DB is special
- Income for life that keeps pace (at least partly) with inflation.
- Employer bears risk, not you.
- PPF safety net if the sponsor fails (100%/90% compensation; cap removed). ppf.co.uk+1
Where DB is less flexible
- Not built for ad-hoc lump sums beyond the initial tax-free cash.
- Harder to leave wealth to non-dependants (e.g., adult children), compared with DC drawdown.
- Scheme rules (not you) set timing, increases, and survivor benefits.
If you’re choosing between DB options—or deciding how DB dovetails with your State Pension, DC pots, ISAs and cash—structured coaching can help you see the whole picture without product bias.
How coaching helps (and what it isn’t)
What I do:
- Translate your scheme rules and statements into a clear income plan.
- Stress-test choices (take cash vs not; retire now vs later).
- Map how DB fits alongside State Pension and any DC/ISA savings.
- Prepare you for a high-quality meeting with a regulated adviser if you need formal transfer advice.
What I don’t do:
- I’m not FCA-authorised, don’t sell products, and won’t lock you into ongoing fees.
- I cannot tell you to transfer out of a DB scheme.
👉 Book your free no obligation 15-minute Zoom discovery call (no obligation) and bring your latest statement. We’ll outline a sensible next step together.
FAQs
Can I take a tax-free lump sum from a DB pension?
Usually yes—by commuting part of the income when you start benefits. Tax-free cash is typically limited by scheme rules and HMRC allowances; you can usually take up to 25% tax-free across all pensions, capped at £268,275, subject to protections. Remember: more cash today means lower guaranteed income for life. GOV.UK
Can I change my income whenever I like?
Not in the same way as DC drawdown. DB pays a regular income that rises by scheme rules. It’s steady, not “pick-and-mix.”
Should I take my DB pension at 55?
Some schemes allow early retirement (even from 55), but the income is usually reduced versus waiting to your NPA. Get the early-retirement factors from your scheme and model the trade-off.
What about ill-health?
Schemes often have ill-health provisions. In some cases you can receive your pension earlier and/or on enhanced terms; rules vary, and “serious ill-health” can trigger different tax rules. Check your scheme booklet and ask the administrator.
What’s the difference between DB and DC again?
DB = a promised income based on salary and service; DC = a pot based on contributions and investment performance that you must manage. With DB, you get less flexibility but far more certainty. MaPS+1
What to do next (simple checklist)
- Gather your paperwork: latest benefit statement, any CETV quote, your scheme booklet.
- Note key facts: accrual rate, pensionable service, normal pension age, revaluation/indexation rules, survivor benefits, and commutation options.
- Map your timeline: when you can take it, when you want to, and how DB fits with State Pension and any DC/ISA savings.
- Talk it through—safely: book a free 15-minute Zoom discovery call. If needed, I’ll help you prepare for a meeting with a regulated adviser (required by law for transfers over £30k), so you ask better questions and spend less time (and money) getting to the right decision.
About the Author
Paul Mitchell is a Financial and Retirement Planning Coach with over 35 years of experience, including achieving Chartered Financial Planner status. Through Your Smart Retirement Coach, he helps DIY investors and those underserved by traditional IFAs navigate complex retirement challenges with clarity and confidence.
Disclaimer:
This article is for educational purposes only and does not constitute regulated financial advice. Tax treatment depends on individual circumstances and may change. Pension rules can change, and investments can fall as well as rise. Past performance doesn’t guarantee future results. For regulated financial advice, consult an authorised IFA
Helpful further reading (external)
- MoneyHelper: Defined benefit (final salary) pensions explained — clear overview of how DB works. MaPS
- PPF: Compensation cap removed — background on the 100%/90% safety net and cap removal. ppf.co.uk+1
- FCA: DB transfer rules and advice requirement — why advice is mandatory over £30,000. FCA+1
- Unfunded public-service DB transfer restrictions — NHS/Teachers/Civil Service. Department of FinanceResearch BriefingsLegislation.gov.uk
- HMRC: Lump Sum Allowance (post-LTA) — 25% rule and the £268,275 cap. GOV.UK
Related reading on Your Smart Retirement Coach
- Financial Coaching vs Regulated Advice—what’s the difference?
https://yoursmartretirementcoach.co.uk/financial-coaching-vs-regulated-advice/ - Pension Withdrawal Options (UK): drawdown, annuities & tax basics
https://yoursmartretirementcoach.co.uk/pension-withdrawal-options-uk/ - Insights
https://yoursmartretirementcoach.co.uk/insights/
