Glossary · UK
What is Defined Benefit (DB) Pension?
A workplace pension that promises a specified retirement income based on salary and years of service, with investment and longevity risk borne by the employer rather than the member.
Full Definition
A defined benefit (DB) pension, sometimes called a final salary or career average scheme, promises to pay a specified level of retirement income calculated using a formula based on the member's pensionable salary and length of pensionable service, rather than depending on how much has been paid in or how investments have performed. The employer (or, for public sector schemes, the government or relevant body) is responsible for ensuring enough money is available to pay the promised benefits, bearing the investment risk and the risk that members live longer than expected, which is the opposite of a defined contribution pension, where the member bears that risk and the eventual pension depends entirely on the pot built up. DB pensions typically increase in payment each year in line with inflation (subject to caps), provide a spouse's or dependant's pension on death, and often allow part of the pension to be exchanged for a tax-free lump sum at retirement. Because DB pensions are expensive for employers to fund and guarantee, most private sector DB schemes have closed to new members or to further accrual over the past two decades, while most public sector schemes (NHS, teachers, civil service, local government, police, armed forces) remain open and are now generally run on a Career Average Revalued Earnings basis rather than final salary. Transferring a DB pension to a defined contribution scheme gives up valuable guarantees, so UK law requires anyone with a transfer value over £30,000 to take regulated financial advice before doing so.