Defined benefit schemes

In a defined benefit scheme, your employer promises to give you a pension when you retire. This is usually based on your earnings and how long you’ve been a member of the scheme.

Most employers can’t set a compulsory retirement age, but workplace pension schemes can still set a pension age. Your pension is only payable after that set age. The earliest you can normally start taking a pension is age 55. Whether you can take your benefits this early will depend on the rules of your scheme. You may find that your scheme reduces your benefits if you take them early because the pension is likely to be paid to you for longer.

You can usually take out a cash lump sum, but this will reduce the pension income you get. This decision may also affect the means-tested benefits you get both now and in the future.

If you have or have had cancer, you may be able to retire earlier because of ill health. With some schemes, there are extra benefits to this.

How does a defined benefit scheme work?

In this scheme, your employer promises to give you a pension when you retire. This is usually based on how much you earn and how long you have been in the pension scheme. Common examples of defined benefit schemes are:

  • final salary schemes – these give you a guaranteed pension when you retire. The amount you get is based on your final salary and how long you’ve been in the scheme.
  • career average salary scheme – these give you a guaranteed pension when you retire. The amount you get is based on your average salary over the years you’ve been in the scheme.

You and your employer pay contributions to the scheme. Your employer is responsible for making sure there is enough money at the time you retire to pay your pension. These schemes are run by trustees who look after your interests.

Your pension provider should send you a benefit statement every year. This shows how much your pension benefits are currently worth. It also shows what you may get if you stay in the scheme until the scheme’s normal retirement age.

When you retire, you will normally get a pension which is related to your salary and based on rules set out by the scheme.

Your pension is usually based on:

  • the number of years you’ve been a member of the scheme.
  • your pensionable earnings (these are defined in the rules of the scheme and vary between employers – they are used to calculate what your defined benefit pension will be at retirement).
  • the accrual rate set by the scheme (the rate that you build up pension benefits while you are a member of the scheme – it is usually written as a fraction).

Example of a defined benefit scheme

Harry belongs to a final salary defined benefit scheme. He retires at 65 on a salary of £26,000 a year. He has been in the pension scheme for 24 years.

The accrual rate set by his scheme is 1/60th. This means Harry can expect a pension of 1/60th of his pre-retirement pensionable earnings for each year he belongs to the scheme.

His pension is: 24 x £26,000 divided by 60 = £10,400 a year.


When can I retire?

Most employers can no longer set a compulsory retirement age. However, workplace pension schemes can still set a pension age from which your full pension is payable. Starting your pension earlier will usually mean your pension is a lot lower.

The earliest you can normally start taking a pension is age 55. Whether you can take your benefits this early will depend on the rules of your scheme. You may find that your scheme reduces your benefits if you take them early because the pension is likely to be paid to you for longer.

If you have or have had cancer, you may be able to retire earlier because of ill health. With some schemes, there are extra benefits to this (see below).


How can I take my pension benefits at retirement?

When you reach the scheme’s retirement age, you will get a regular pension income as promised by your employer. You can usually also take out a cash lump sum but this will reduce the pension income you get. The amount of pension income you lose is often high so this may not be a good idea.

You can find details about taking your benefits at the scheme’s retirement age in your scheme booklet. If you do not have a scheme booklet, you should ask your employer for a copy. 

The new April 2015 rules do not apply to defined benefit schemes. But you may be allowed to transfer out of the defined benefit scheme into a defined contribution scheme in order to take advantage of the new rules.


When can I retire due to ill health?

You may be able to retire before the age of 55 (or the age allowed under your scheme’s rules) if you have ill health.

Your illness usually has to be permanent and is stopping you from working. But it may depend on the rules of your pension scheme.

If you qualify for ill-health early retirement, your pension scheme will tell you what your retirement options are. Some schemes may pay a higher pension if you are able to do some or any work.

Life expectancy less than 12 months

If you have a life expectancy of less than 12 months, you may be able to retire because of serious ill health.

You will usually get a one-off lump sum representing the value of your pension benefits (although your scheme may keep some back to pay benefits to any dependants you have).

If you’re under 75, the whole sum will usually be tax-free. In this case, a registered medical professional must give evidence to the scheme administrator that your life expectancy is less than a year.

If you are 75 or older, 25% of the lump sum will be tax-free and the rest taxed as income.

Instead of a lump sum, you may get a regular pension income. This may be higher than you would normally get as you will probably be claiming it for a shorter period of time.

If you die while still in employment, your pension scheme may pay out a lump sum called death in service. But this is not paid after you have retired. It’s important to speak to a financial adviser to make sure you choose the best option for your situation and for your dependants.

Defined benefit schemes can have very different rules so it’s very important to talk to your pension provider as soon as possible.

‘I'd been offered medical retirement, which I accepted, but I had a pretty small pension. Macmillan was there with advice on completing forms for benefits.’ Gary

Gary


If you’re getting means-tested benefits

You may be able to get means-tested benefits if your income and savings are below a certain level. Deciding whether to take your pension savings as a regular income or one or more lump sums may affect the means-tested benefits you get both now and in the future. This can be complicated to work out, so you may want to contact our welfare rights advisers on 0808 808 00 00.

Back to Pensions

Understanding pensions

There are many different pension schemes available, including the State Pension paid by the government.

Pension changes

Since April 2015, some types of pension have become more flexible.

State pensions

The State Pension is a regular payment you can get from the government when you reach retirement age.

Workplace pensions

A workplace pension is a pension scheme arranged through your employer. There are different types of workplace pensions.

Personal pensions

Personal pensions are often available through your workplace. But self-employed people often have them too.