Defined Benefit Pension
A pension scheme that pays a guaranteed income in retirement based on your salary and years of service.
A defined benefit (DB) pension, sometimes called a final salary or career average pension, is a workplace scheme that promises you a specific income in retirement. The amount you receive is calculated using a formula based on your salary (either your final salary or an average across your career) and the number of years you were a member of the scheme. The employer bears the investment risk, meaning your promised benefit does not depend on how the underlying investments perform.
For example, a scheme might offer 1/60th of your final salary for each year of membership. If you worked for 30 years and your final salary was £48,000, your annual pension would be £24,000. Career average schemes work similarly but use your average earnings throughout your membership, usually revalued each year to account for inflation.
Defined benefit pensions are widely regarded as the most valuable type of pension because of the guaranteed, inflation-linked income they provide. However, they are now rare in the private sector due to the cost and risk to employers. Most DB schemes in the private sector are closed to new members. If you have a DB pension, think very carefully before transferring it — in most cases, keeping the guaranteed income is the better option, and you are required to take independent financial advice for transfers worth more than £30,000.