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Defined benefit pensions

What is a defined benefit pension scheme?

A defined benefit pension scheme entitles employees to a retirement income based on the salary they’ve earned, and length of time they’ve worked for their employer. This means you will receive a guaranteed amount when you choose to leave work, as opposed to making regular pre-tax contributions throughout your career. When it comes to cashing in a defined benefit pension, the higher your salary, and longer you’ve worked with your employer, the better off you’ll be in the long run.

Who is a defined benefit pension for?

Defined benefit pensions are traditionally very popular in the public sector workplace and, though they are offered by some private companies, tend to be for government employees. They typically fall into two categories: those that are based on your final salary, and those that take into account an average of your salary payments across your career.

A number of years ago, they were seen as a secure option for those wishing to stay in their chosen career for a long period of time. More recently, businesses have struggled to fund defined benefit pensions, as they are responsible for committing to a defined income ahead of employees reaching retirement age.

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Advantages of a defined benefit plan

When looking at your retirement options, it’s important to assess the advantages and disadvantages of the various pension plans available to you. One of the strengths of a defined benefit pension scheme is something called ‘index linking’, whereby your income can incrementally rise in line with inflation.

Other advantages of a defined benefit plan include receiving your full contribution if you have to retire earlier than anticipated due to ill health, and payments to dependents if you die ahead of retirement age. One of the main attractions of this particular plan is the fact that your income is ‘defined’ irrespective of how the investments have performed on the market. 

Limitations of a defined benefit plan

While defined benefit pension schemes suit those in a stable employment, it may not be the best choice if you change careers often. Companies may require minimum terms of service before you become eligible for the scheme. They don’t suit everyone, as employees can’t choose how their money is invested or top up the amount paid into the pot themselves. Not all defined benefit pension schemes will allow you to transfer funds to a new workplace, so be sure to check with the provider’s administrator.

How to calculate defined benefit pensions

Your circumstances and the scheme’s terms and conditions will influence how to calculate defined benefit pension value. In most cases, you can begin to take your pension at the age of 55, but there may be costs involved with leaving before state retirement age. Check with your provider for the details of your pension scheme.


Calculating your income from this pension can be done in a few simple steps. First, take the number of years you have been a member of the defined benefit pension scheme, then divide it by the accrual rate (a percentage of pensionable pay), and multiply it by your pensionable earnings.

For example:

  • You’ve worked at your company for 40 years
  • Your annual income before tax is £27,000
  • The schemes accrual rate is 1/60th
  • Your annual pension income would be £18,000

Lump sum payments

Cashing in a defined benefit pension will relinquish the security of regular lifetime payments, but it offers the flexibility of being able to manage and invest your money where you see fit. There may be the option to take a lump sum depending on the ‘commutation factor’ determined by the provider’s actuary. This will mean giving up some of the potential income you could earn annually from your pension plan. Under current law, the UK government allows you to take 25% of the lump sum completely tax-free. Withdrawing the entire pension pot could be risky. Cashing in a defined benefit pension can clear debts, but won’t look after your loved ones in the long run.

You could, however, investigate depositing part of a lump sum into a fixed annuity insurance policy, guaranteeing a certain interest rate, and invest the leftover funds accordingly.

Transferring your defined benefit pension

A defined benefit pension transfer is an irreversible decision, and can affect your income projection after retirement. If you have dependents, or will rely on regular lifetime payments, it may not be the right choice for you. Individuals who usually benefit from transferring their pension are those who aren’t solely reliant on their workplace pension as retirement income. If you want control of your investments, a self-invested personal pension (SIPP) could be beneficial, allowing you to buy property, stocks, and shares.

If you want your retirement income to be in the currency of your chosen home, then a qualifying recognised overseas pension scheme (QROPS), may be a good move. The scheme must comply with UK tax law, and it is important to consider the loss of any perks associated with it.

Our financial advisors can provide guidance on how to make a defined benefit pension transfer based upon your personal circumstances.

How this works for expats

If you wish to spend your retirement on sunnier shores, you don’t have to make a defined benefit pension transfer from your current UK workplace pension scheme. Commission rate fluctuations can be managed by setting up a foreign exchange account. You may be working for a company abroad that provides employees with a QROPS, but it’s important to check your limitations when it comes to tax relief and regulations. 

Gilt yields

Bonds held by the UK Government and across the Commonwealth are referred to as gilts. They generally tend to be low risk, and therefore low return, but are strongly influenced by the political climate. A defined benefit pension transfer can be affected by the value of gilt yields, as the income you receive is based upon the market at the time of purchase.

Defined benefit pension advice from Blacktower

When it comes to advice on defined benefit pensions, you know you are in safe hands with Blacktower, one of the leading wealth management experts in the UK and abroad. Whether you’re keen to provide for your family, or relocate to your dream destination, our highly qualified, multilingual team is here to help. Alternatively, we can also advise you on defined contribution schemes, SIPPs, QROPS, and QNUPS.

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