If you're one of the lucky ones with a Defined Benefit (DB) pension, you might feel reassured — and maybe a little confused. These pensions are known for being secure and generous, but they’re not always easy to understand. In this episode of the Wealth of Advice Podcast, we break down what DB pensions really offer, how they’ve evolved over time, and what to think about when deciding how and when to take yours. You can watch the podcast episode below, or keeping reading if you'd prefer a high-level overview.

‍

‍

‍

What is a Defined Benefit Pension?

Defined Benefit pensions promise a guaranteed income for life, based on how long you’ve worked and how much you earned. They were once the norm, particularly in the public sector and larger corporations, but over the years have become less common due to the cost and complexity of running them.

There are two main types:

• Final Salary schemes: which base your pension on your salary at (or near) retirement.

• Career Average schemes: which average your pay across your working life.

Either way, the core principle is the same — a predictable income that typically rises with inflation and doesn’t depend on investment returns.

‍

‍

How Do They Work in Practice?

Each year you work builds up an entitlement with your annual pension dictated by your salary and length of service. They are seen as a benefit as they usually provide a:

• Guaranteed income for life

• Inflation linked income

• Spouses or dependents pension

• No investment risk

• No ongoing charges

‍

‍

What Are Your Options at Retirement?

Once you reach your Normal Retirement Date (NRD), you will be able to access your pension unreduced and will have a number of options:  

• Receive a maximum regular income regular income (scheme pension) with no or minimal tax-free lumpsum

• Take a reduced scheme pension in exchange for a larger a tax-free lump sum.  

Some schemes also allow you to transfer your Defined Benefit Pension to a Defined Benefit Pension, allowing you to access your benefits flexibly.

‍

‍

Can You Access It Early?

While many people assume they must wait until the scheme’s “normal pension age”, that’s not always the case. Retiring early may be possible — but usually comes with an early retirement factor, which reduces your pension to reflect the longer time you’re expected to draw it.  

Conversely, deferring your pension past normal retirement age can sometimes result in a higher income, though again this depends on scheme rules.

‍

‍

The Role of AVCs (Additional Voluntary Contributions) 

If you're a member of a Defined Benefit pension scheme, you may have the option to pay into an AVC plan. These sit alongside your main scheme and allow you to boost your retirement benefits in a flexible, often tax-efficient way.

There are generally two types:

• In-scheme AVCs – run by your DB provider and often offering attractive terms, such as the ability to take some or all of your AVC pot as tax-free cash.

• Free-standing AVCs (FSAVCs) – separate pensions that work more like modern defined contribution schemes.

One of the key benefits of in-scheme AVCs is that they may allow you to take your 25% tax-free cash from the AVC pot instead of reducing your guaranteed pension. This can be a very tax-efficient way to access cash while preserving the value of your DB income.

‍

‍

What If Your Employer Goes Bust? 

One common concern for Defined Benefit pension members is what happens if their employer becomes insolvent. The good news is that your pension isn’t left hanging in the balance.

Defined Benefit schemes are protected by the Pension Protection Fund (PPF) — a government-backed safety net set up to ensure that members still receive their pension, even if the sponsoring employer can no longer pay. They will protect your pension:

• 100% if you:

• are already at or over your normal pension age

• retired early due to ill-health, or

• already receive a ‘survivor’s pension’ – where someone died and their pension is paid to you  

• 90% if you haven’t retired yet.

‍

‍

Pros and Cons of Defined Benefit Pensions

Pros:

• Guaranteed income for life: You receive a steady, predictable income, no matter how long you live.

• Inflation protection: Most schemes increase your pension in line with inflation (usually CPI), helping maintain your purchasing power.

• No investment risk: The pension provider bears the investment risk, so your income won’t fluctuate with market ups and downs.

• No management fees: Unlike defined contribution schemes, you don’t pay ongoing fund management charges.

Cons:

• Limited flexibility: Your income is fixed by the scheme rules, so you can’t easily adjust withdrawals or take lump sums beyond what’s allowed.

• Restricted death benefits: Typically, pensions pass to your spouse but rarely to other beneficiaries, and the amounts can be limited.

• No control over investments: You cannot choose how your pension funds are invested.

• Early access penalties: Taking your pension before normal retirement age usually reduces your income via early retirement factors.

‍

‍

Final Thoughts

Defined benefit pensions are incredibly valuable, but they’re not always straightforward. Whether you’re deciding when to take your pension, how much tax-free cash to withdraw, or whether to transfer out, it’s essential to understand your options and get the right advice. 

‍

‍

Need Help Navigating Your Defined Benefit Pension? 

At Wealth of Advice, we’re pension transfer specialists who can help you understand your scheme, explore your options, and make the best decision for your future. 

Book a free consultation today to get personalised advice on your defined benefit pension.

‍