Pension Transfers & Defined Benefit Pensions UK

Defined Benefit vs Defined Contribution Pension

Understanding the difference between DB and DC pensions. Final salary vs money purchase schemes, and what each means for your retirement.

· · 4 min read

Pension information is based on current UK legislation. Pensions are regulated by the FCA and The Pensions Regulator. This is not financial advice — consider consulting an FCA-regulated financial adviser.

Understanding the two main types of workplace pension and what they mean for your retirement.

For the wider cluster covering workplace pensions, auto-enrolment and public-sector schemes, use the main Workplace Pensions hub.

Quick Comparison

Feature Defined Benefit (DB) Defined Contribution (DC)
Retirement income Guaranteed Depends on pot size
Investment risk Employer bears You bear
Final amount Known formula Unknown until retirement
Common in Public sector Private sector
Also called Final salary, career average Money purchase

Defined Benefit Pensions

How They Work

Element Details
Promise Specific income in retirement
Calculation Based on formula
Factors Salary × years × accrual rate
Investment Employer manages
Risk Lies with employer

Types of DB Pension

Type How It’s Calculated
Final salary Based on leaving salary
Career average Based on average salary
CARE Career Average Revalued Earnings

DB Calculation Example

Final Salary Scheme Calculation
Final salary £50,000
Years in scheme 20
Accrual rate 1/60th
Annual pension £50,000 × 20 × 1/60
= £16,667/year

Common Accrual Rates

Rate Per Year of Service
1/60th 1.67% of salary
1/80th 1.25% of salary
1/57th 1.75% of salary (NHS)

DB Benefits

Benefit Details
Guaranteed income For life
Usually inflation-linked CPI/RPI increases
No investment decisions For you
Often spouse pension Included
Predictable Know what you’ll get

DB Drawbacks

Drawback Details
Less flexible Set income
Employer dependent If they fail
Can’t vary income Tax planning harder
Tied to one employer To maximise benefit

Defined Contribution Pensions

How They Work

Element Details
Contributions You and employer pay in
Investment Money invested in funds
Growth Depends on performance
Final pot Contributions + growth
Risk You bear it

DC Calculation

What Determines Pot Impact
Your contributions More = bigger pot
Employer contributions More = bigger pot
Investment returns Can grow or shrink
Charges Reduce final pot
Years contributing More time = growth

DC Example

Monthly Contributions Over 30 Years
You: £200
Employer: £150
Total: £350/month
Assuming 5% growth
Estimated pot ~£290,000

DC Benefits

Benefit Details
Portable Move jobs easily
Flexible access Drawdown options
Tax planning Control income
Investment choice Some control
Inheritance Pass on pot

DC Drawbacks

Drawback Details
Investment risk On you
Unknown income Until retirement
Longevity risk Might outlive pot
Requires decisions Ongoing

Side-by-Side Comparison

Income Certainty

Scenario DB DC
Good markets Same income Higher pot
Bad markets Same income Lower pot
Live to 100 Same income Pot may run out

Flexibility

Feature DB DC
Vary income No Yes
Tax planning Limited Better
Leave inheritance Limited Full pot
Access before death Set income Flexible drawdown

Employer Contributions

Type Typical Contribution
DB (public sector) 20-30% of salary
DC (private sector) 3-10% of salary

Which Do You Have?

Signs of DB Pension

Indicator
Called “final salary”
Called “career average”
Statement shows projected annual income
Public sector employment
Long-established employer

Signs of DC Pension

Indicator
Shows pot value
Investment fund choices
Called “money purchase”
Auto-enrolment pension
Most modern workplace pensions

Public Sector Pensions

Main Schemes

Sector Scheme Type
NHS NHS Pension DB (CARE)
Teachers Teachers’ Pension DB (CARE)
Civil Service Civil Service Pension DB (CARE)
Local Government LGPS DB (CARE)
Armed Forces AFPS DB

Typical Terms

Feature Public Sector DB
Accrual 1/54th to 1/57th
Retirement age State Pension Age
Inflation linking Yes (CPI)
Spouse pension Usually 50%
Lump sum Option to commute

Private Sector Reality

Changes Over Time

Era Common Pension Type
Pre-1990s DB (final salary)
1990s-2000s DB closing to new members
2012 onwards DC (auto-enrolment)
Now Almost all DC

Why DB Disappeared

Reason Impact
People living longer More expensive
Investment risk Companies can’t bear
Accounting rules DB liabilities on books
Cost DB much more expensive

If You Have Both

Managing Multiple Pensions

Strategy
Keep track Of all pensions
Value DB higher Than pot size suggests
Consider DB value When planning DC contributions
Don’t transfer DB Without advice

Valuing a DB Pension

Rule of Thumb Calculation
Multiply annual pension By 20
£15,000/year DB ≈ £300,000 DC equivalent

Transfers

DB to DC Transfer

Consideration Details
Almost never advisable For most people
Advice required Over £30,000
Giving up Guaranteed income
Scam risk High in this area
Exceptions Very specific circumstances

When Transfer Might Work

Rare Situation Why
Terminal illness Access money now
Very low transfer value Relatively
Poor employer/scheme health Insolvency risk
High value + short life expectancy Get advice

Summary

Question DB DC
How much will I get? Formula tells you Depends on pot
Who bears risk? Employer You
Flexibility Low High
Generally better? Yes (if available) Standard now
Your responsibility Stay in scheme Contribute well, invest wisely
Key Takeaways
DB is valuable Don’t transfer lightly
DC needs attention Contributions and investments
Know what you have Check pension type
Public sector Likely DB (keep it)
Private sector Likely DC (maximise it)

Sources

  1. GOV.UK — Pension and retirement
  2. MoneyHelper — Pensions guidance