Defined Benefit Pensions: Final Salary or Career Average Schemes

Defined benefit schemes are valuable.

They have been called ‘gold plated’ for good reason. A guaranteed, inflation linked lifetime income with attached death benefits for the husband/wife? Sounds perfect. But have you looked into the alternative pension plans available? A DB scheme is pre-designed by an employer and has limited options at retirement.

Offering a steady lifetime income with spousal death benefits, a defined benefit pension isn’t always the perfect retirement plan.

Is a final salary scheme best for you?

If you’re the sort of person who needs to live to a budget, a regular steady income with minimal management, then a final salary scheme is your gold-plated retirement plan. However, if you’ve been working your socks off and are planning a wonderful retirement full of family, friends and travel; if you want to pay off that dreaded mortgage or live life while your health’s still good, then perhaps it’s worth reviewing your options.

For detailed information and guidance, read our FREE Guide to Pension Transfers.

What’s great about a final salary scheme (also known as ‘defined benefit’) is their predictability; their pre-defined structure.

How do defined benefit schemes work?

Upon leaving active scheme membership, pension benefits become ‘preserved’. This means they are linked to the salary earned while in that job. When leaving the scheme, your pension freezes; no growth will accrue, no further pension will build. Instead, you’ll receive a statement about what your pension income is worth at scheme retirement age. Subject to your former employer maintaining healthy accounts, that’s what you’ll get. In the event of your death, your spouse will likely receive a proportion of your pension for their lifetime. The details of what you’ve got in place are easy to grasp, but it’s important that you take time to understand alternative pension structures available, which might just surprise you.

A defined benefit scheme’s value is in its total ‘output’ – which is entirely dependent on how long you live! These plans can be valued automatically when considering your exposure to the lifetime allowance.

In headline terms, a final salary scheme provides a backbone pre-defined income structure, while a private arrangement such as a Self-Invested Personal Pension (SIPP: UK based) or Qualifying Recognised Overseas Pension Scheme (QROPS: based in a jurisdiction offshore) means the pension funds are instead in your hands or the hands of a good adviser, if you have one.

Final salary schemes can be transferred. You must ask for a Cash Equivalent Transfer Value (CETV) and full information about your pension scheme before taking UK regulated advice.

Why transfer to private pension planning?

With a private pension there’s more opportunities to plan; to design your own retirement and draw out a regular income as well as lump sums to your liking.

A private pension plan allows you to access funds for those irregular spends, as well as adjust income to fit your lifestyle. It offers increased control and allows you to manage what age you retire, what currency your income is paid in and how much income you take each year. It allows you to plan for tax, wherever you are in the world. Your funds can benefit from long term market growth. Upon death, you can leave your funds to whomever you choose, tax efficiently.

The most important thing you can do as a defined benefit scheme member is ensure you understand what you have. You should get to know the health of your scheme, and how it is managed.

Understand your defined benefit scheme and pension transfer options

Read our FREE full guide to Pension Transfers for further information on how to transfer a final salary pension, and make sure you read our Retirement Options Guide, to help you understand your options at-retirement, whatever type of pension you have.


Pension Transfer Personality Quiz

Take our free pension transfer personality quiz to find out if a pension transfer is right for you!

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How would you describe your investment or financial planning experience?

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Pension Knowledge Test

Test your knowledge with our quick quiz! Like learning? Restart the quiz to explore our question bank!

1 / 5

How much of a pension fund is usually available as a tax free Pension Commencement Lump Sum at retirement?

2 / 5

What does SIPP stand for?

3 / 5

What is the financial term for the tax free lump sum from a UK pension?

4 / 5

What do RPI, CPI, AWE and LPI have in common?

5 / 5

How are bank deposits protected in UK banks and bank accounts held within pension plans?

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