Defined Benefit Pension

What is a defined benefit pension?

A defined benefit pension promises you a specific income when you retire. The amount is calculated using a formula—typically based on your salary and how many years you worked there. It’s not affected by stock market performance.

These are also called “final salary” or “career average” pensions, depending on how the benefit is calculated.

How is the income calculated?

The formula varies, but a common one is:

Years worked × Accrual rate × Salary = Annual pension

For example: 20 years × 1/60th × £40,000 salary = £13,333 per year for life.

Some schemes use your final salary, others use an average across your career.

Who gets the investment risk?

The employer. They promise to pay you a certain amount regardless of how their pension fund performs. If investments do badly, the employer has to make up the shortfall. This is why defined benefit schemes are expensive to run and increasingly rare.

Are they still available?

Mostly in the public sector—teachers, NHS, civil servants, police. Most private companies have closed their defined benefit schemes and moved to defined contribution instead.

If you have one, it’s usually valuable. Think carefully before transferring out.

Key points

• Guaranteed income for life – based on salary and years worked
• Employer takes the investment risk – not you
• Rare in private sector now – mostly public sector
• Usually valuable – get advice before transferring