Comparison · Pensions · 2026
Final Salary vs Money Purchase Pension 2026: Key Differences
A final salary pension, known technically as defined benefit, promises a guaranteed income for life based on your salary and service, with the employer carrying all the risk. A money purchase pension, or defined contribution, is a pot you build and invest, where the outcome depends on contributions and market returns. For 2026/27 the choice is rarely yours to make from scratch, but understanding the differences matters hugely if you have both, or are tempted to transfer. This comparison explains guarantees, flexibility, transfers, death benefits and tax-free cash.
TL;DR - 30-Second Summary
- - Final salary: guaranteed income for life, employer carries the risk
- - Money purchase: a pot you invest, flexible but uncertain outcome
- - Guarantees usually win: keep a final salary pension if you have one
- - Transfers: require regulated advice above £30,000 and rarely suit members
Side by Side
| Feature | Final Salary (DB) | Money Purchase (DC) |
|---|---|---|
| Retirement income | Guaranteed for life | Depends on pot and markets |
| Who carries risk | The employer | You |
| Inflation protection | Usually built in | Only if you buy it |
| Flexibility | Low | High, full pension freedoms |
| Tax-free cash | Via commutation of income | 25% of pot |
| Death benefits | Reduced spouse pension | Full pot to beneficiaries |
| Where found | Mostly public sector now | Most private workplaces |
Worked Example: Comparing the Outcomes
Imagine two colleagues retiring with similar careers. One has a final salary pension promising £15,000 a year for life, rising with inflation and paying a spouse pension. The other has a money purchase pot they must turn into income themselves.
| Outcome | Final Salary | Money Purchase |
|---|---|---|
| Annual income | £15,000 guaranteed | Variable, set by the pot and choices |
| Inflation rises | Usually included | Only if income strategy provides it |
| If markets fall | No effect on you | Income and pot can fall |
| Leaving money to heirs | Limited spouse pension | Whole remaining pot |
To match a £15,000 inflation-linked income with a spouse pension, a money purchase saver might need a very large pot, because guaranteed lifetime income is expensive to buy. That is why a final salary promise is so valuable. Project a money purchase pot with the pension calculator.
The Transfer Question
The flexibility and death benefits of money purchase tempt some people to transfer a final salary pension into a personal pot. This means swapping a guaranteed, inflation-linked income for a cash transfer value to invest yourself. For values above £30,000 regulated advice is legally required, and the regulator starts from the position that a transfer is not in most members interest.
A transfer can occasionally suit specific situations, such as serious ill health that shortens life expectancy, or where flexible death benefits matter more than guaranteed income. For the great majority, keeping the guarantee is the safer course.
Who Should Choose What
- - You want certainty of income for life
- - You want built-in inflation protection
- - You want a spouse pension provided automatically
- - You prefer no investment risk in retirement
- - You want full flexibility over how you draw income
- - You want to control the investments
- - You want to pass the whole pot to heirs
- - You are happy to carry the investment risk
Verdict
A final salary pension is one of the most valuable benefits anyone can have, because it removes investment and longevity risk and usually keeps pace with inflation. If you have one, the default is to keep it. Money purchase pensions are the norm in the private sector and bring real advantages in flexibility and death benefits, but they put the risk and the planning squarely on your shoulders. Most people end up with money purchase by default, so the key is to contribute enough and invest sensibly, while treasuring any final salary entitlement you have. Take regulated advice before any transfer.