Defined Benefit vs Defined Contribution Pension — Which Is Better?

How a Defined Benefit Pension Works

A DB pension is a promise from your employer (or the government, for public sector workers) to pay you a specific income in retirement, regardless of investment performance. The income is calculated using a formula — typically either:

• Final salary: pension = (years of service ÷ accrual rate) × pensionable salary at retirement
• Career Average Revalued Earnings (CARE): pension = sum of each year's accrual (salary × 1/accrual rate), revalued by CPI each year to retirement

Example: 30 years of service at a 1/60th accrual rate on a final salary of £40,000 produces a pension of £20,000/year. Most public sector schemes have moved to CARE since 2015, while many older private sector final salary schemes are now closed to new accrual.

DB pensions typically include inflation-linked increases in payment (CPI or RPI), a spouse's or dependant's pension (typically 50% of the member's pension), and a death-in-service lump sum. They are among the most valuable benefits available to UK employees.

How a Defined Contribution Pension Works

A DC pension is a pot of money built from contributions made by you, your employer, and tax relief from HMRC. The pot is invested in funds you choose (or a default fund), and grows over time. At retirement, you use the pot to generate income — via drawdown, an annuity purchase, UFPLS withdrawals, or a combination.

The final retirement income from a DC scheme depends entirely on three things: how much was contributed, how the investments performed, and how you draw the pot at retirement. You bear all the investment risk and longevity risk.

Head-to-Head Comparison

Valuing a DB Pension: The CETV Multiple

To compare a DB pension to a DC pot, the key tool is the Cash Equivalent Transfer Value (CETV) multiple. The CETV is the lump sum your DB scheme would transfer to a DC pension if you chose to leave. Dividing the CETV by the annual DB pension income gives a multiple that indicates the implied capital value of the promise.

In recent years, CETV multiples have ranged widely — from around 20x to 40x or more, driven by gilt yields and actuarial assumptions. A CETV of £300,000 replacing £12,000/year of index-linked DB income represents a multiple of 25x. Actuaries generally regard multiples of 30x or above as generous. However, the CETV multiple alone does not tell you whether a transfer is worthwhile; you also need the critical yield.

The Critical Yield: Will DC Ever Beat DB?

The critical yield is the annual investment return (net of all charges) that the transferred DC pot would need to earn from the transfer date to retirement to generate the same income as the DB pension — including all its features (inflation-linking, spouse's pension, guaranteed payment for life).

For a 50-year-old with 15 years to retirement, a generous DB pension, and a CETV of 30x, the critical yield might be 4-5% — achievable but not certain. For a 40-year-old with a 25-year runway, the same pension might require only 3% — easier to hit. For a 55-year-old with 10 years to retirement, the yield might jump to 7-8% — very hard to achieve consistently net of charges.

The FCA requires regulated financial advice from an IFA or pension transfer specialist (PTS) for any DB transfer above £30,000. The FCA's starting assumption is that transferring out of a DB pension is unlikely to be in your best interests.

Protected Benefits and Safeguarded Rights

Before the Pension Freedoms introduced in 2015, many members built up protected benefits in older schemes — including guaranteed annuity rates (GARs), protected tax-free cash above 25%, and guaranteed minimum pensions (GMPs). These benefits are typically lost if you transfer out. A GAR can be extremely valuable: the right to convert your DC pot to an annuity at a rate of 9% or 10% (common in pre-1988 contracts) is worth far more than the open-market rate of roughly 6-7% for a standard annuity in 2026. Always identify any protected benefits before considering a transfer.

PPF: What Happens If Your Employer Fails

The Pension Protection Fund (PPF) is the safety net for private sector DB members whose employer becomes insolvent. If the scheme cannot meet its liabilities in full, the PPF steps in. Members who have already reached their scheme's normal pension age at the point of insolvency receive 100% of their accrued pension (subject to PPF compensation caps). Members below normal pension age receive 90% of their accrued pension, subject to the PPF annual cap (£44,044/year for a 65-year-old in 2026/27, with the cap scaled by age factors).

PPF protection is substantial but not absolute — the 90% level and the compensation cap mean that high earners in well-funded DB schemes bear a small residual risk. Public sector pensions carry no such risk: they are backed by the full faith of HM Treasury.

DC Advantages: Flexibility and Death Benefits

The pension freedoms introduced in 2015 transformed the attractiveness of DC pensions for those approaching retirement. Key DC advantages:

• Flexi-access drawdown: Keep the pot invested and draw income at a rate of your choosing. No obligation to buy an annuity.
• UFPLS (Uncrystallised Fund Pension Lump Sums): Take chunks from the pot at any time — 25% of each chunk tax-free, 75% taxable as income.
• Death benefits: If you die before age 75 with unspent DC funds, the pot passes to your nominated beneficiaries free of income tax and (currently) outside your estate for IHT purposes. After 75, the beneficiaries pay income tax on drawdowns at their marginal rate. DB death benefits are typically limited to a spouse's pension (50% of the member's pension) and a death-in-service lump sum.
• No means-testing interaction: DC drawdown income counts as income for tax purposes but is not subject to the complex means tests that affect some benefits. Both DB and DC pension income count for Pension Credit assessment.

Gold-Plated Public Sector DB Pensions

For NHS, Teachers, Civil Service, Police, Fire and Armed Forces pension members, the case against transferring is overwhelming in almost all circumstances. These schemes offer:

• CPI-linked pension increases in payment (preserving purchasing power over a 20-30 year retirement)
• Spouse's pension of 37.5-50% of the member's pension
• Government-backed guarantee (no PPF required)
• Employer contributions of 20-23% of salary — far exceeding private sector norms
• Normal pension ages of 60 or 65, with actuarial reduction for earlier access

The employer contribution alone — if matched in a DC scheme — would compound to a very large pot over a career. For most public sector workers, the DB pension is the most valuable financial asset they will ever hold.

Who Should Consider a DB Transfer? (Rare Cases)

Converting a DC Pot to Income: The Comparison Point

To directly compare a DB income to a DC pot, you can reverse-engineer the annuity price. In 2026, a standard level annuity for a healthy 65-year-old yields approximately 6-6.5% (i.e., a £100,000 pot buys roughly £6,000-6,500/year). An RPI-linked joint-life annuity might yield 4-4.5% on the same pot. This means a DB pension of £10,000/year is approximately equivalent (in annuity terms) to a DC pot of £154,000-£250,000, depending on the annuity type matched.

CETV multiples above these implied annuity multiples suggest the DB scheme is offering more generous terms than the open annuity market — reinforcing the case for staying in the DB scheme rather than transferring.

The Verdict

For the vast majority of members, a DB pension is a highly valuable and irreplaceable benefit that should not be given up lightly. The guaranteed income, inflation protection, spouse's pension and longevity risk pooling cannot be replicated cheaply in the DC world. DB transfers are appropriate only in specific, well-defined circumstances — and must always be supported by regulated financial advice for pots above £30,000. If you have a public sector DB pension, the case for keeping it is almost always compelling.

Key Sources

• FCA: Defined Benefit Pension Transfers
• Pension Protection Fund (PPF)
• MoneyHelper: Defined Benefit Pensions
• GOV.UK: Types of Workplace Pensions