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.