Defined Benefit (DB) Pension Schemes

A Defined Benefit (DB) pension scheme provides a guaranteed income in retirement. Here’s how it works:

• Employer and employee contributions: Both contribute tax-free (within HMRC limits), contributions depend on the specifics of your pension arrangement.
• Accrual rate: The proportion of your pensionable pay you’ll receive for each year of pensionable service (e.g. 1/60th).
• Access age: You can usually access your pension from age 55 (rising to 57 from 2028). However, each scheme sets the age at which you can access your pension, this is usually referred to as the Normal Pension Age (NPA).
• Guaranteed income: Your guaranteed annual pension is determined by the scheme’s accrual rate, and your pensionable service and pay. It will pay out for your life and may provide a pension for your dependants after your death.

As a member there are two ways you may have built up benefits:

• Final Salary Schemes: In a final salary scheme, your pension is calculated based on your pensionable pay at the time of your retirement (or, in some cases, your highest pensionable pay over several years). This means that if you receive a pay rise just before retirement, your annual pension will be higher. The definition of final pay, should be confirmed in the scheme rules.
• Career Average Revalued Earnings (CARE) Schemes: In a CARE scheme, your pension is based on your average pensionable pay throughout your career, not just your final salary. Each year, a portion of your pensionable pay is added to your pension pot, which is then adjusted for inflation.

For example - If your scheme is a final salary scheme and you retire with a pensionable pay of £30,000 with an accrual rate of 1/60, you’ll receive £500 annually for each year of service. So if you reach 30 years of service, your pension will pay out £15,000 a year - 30/60 x £30,000 = £15,000.

Early Retirement in DB Schemes

Most but not all DB schemes allow you to retire before your Normal Pension Age NPA. If you take your pension before your NPA, the annual income will usually be reduced. It’s not uncommon to see a reduction rate of around 5% for every year you take your pension before your NPA. Check with your pension provider for your scheme’s reduction rate or ask about this by contacting the my wealth helpline.

Lump Sum Options

As well as providing you with a pension income when you retire you will usually be entitled to a tax-free lump sum from your defined benefit pension.

Some DB schemes provide a tax-free cash lump sum in addition to the pension income that has been built up. Others provide members with the choice of reducing the starting pension in return for a tax free lump sum at retirement.