CATEGORY: Pensions
DESCRIPTION: If you've ever worked in the public sector or an older private employer, you may have a defined benefit pension. It's a valuable but widely misunderstood asset.

SECTION: The Two Types of Pension
Most people in the UK have a defined contribution (DC) pension — a pot of money that grows based on contributions and investment returns. The amount you get at retirement depends on how much went in and how markets performed.

A defined benefit (DB) pension works completely differently. Instead of a pot, you're promised a specific income for life in retirement, calculated by a formula based on your salary and years of service. The investment risk sits with the employer, not you. If the fund underperforms, it's the employer's problem to make up the shortfall, not yours.

SECTION: How Defined Benefit Pensions Are Calculated
Most DB pensions use one of two formulas:

Final salary: Your pension is calculated as a fraction of your salary at retirement (or at the point you left the scheme), multiplied by years of service. For example: 1/60th × 20 years × £40,000 final salary = £13,333 per year for life.

Career average (CARE): Your pension is based on an average of your salary across your entire career, revalued each year in line with inflation or a set rate. This is now more common, particularly in the public sector, as it's less costly for employers.

SECTION: Who Still Has a Defined Benefit Pension?
DB pensions are largely found in:
- The public sector: NHS, teachers, civil servants, police, firefighters, and armed forces all have generous DB schemes. These are among the most valuable employee benefits in existence.
- Older private sector schemes: Many large private companies ran DB schemes until the 1990s and 2000s, when the rising cost of funding them led to widespread closure to new members or closure to future accrual.

If you've worked in any of these sectors, check whether you still have a deferred pension entitlement waiting for you at retirement.

SECTION: Why DB Pensions Are So Valuable
The guaranteed income for life is the key feature. You won't outlive a DB pension — it pays until you die, and in many cases, it continues to pay a reduced amount to a surviving spouse or partner after your death.

DB pensions are also typically inflation-linked, increasing in payment each year in line with CPI or RPI (subject to scheme rules and caps). This protects your spending power in retirement in a way that a fixed annuity or cash savings often doesn't.

To understand the true value, financial planners use a transfer value multiplier. If your DB pension would pay £10,000 per year and a transfer would be worth £300,000, the implied value is 30 times the annual income. Recreating this level of income with a DC pot and drawdown is extremely expensive and carries investment risk.

SECTION: Can You Transfer a Defined Benefit Pension?
Yes, you can transfer a DB pension into a DC pension — this is called a transfer value. Transfer values are expressed as a cash sum your scheme will pay out in exchange for giving up the guaranteed income. These values can sometimes be very large, especially when interest rates are low.

However, for DB pensions worth more than £30,000, you are legally required to receive regulated financial advice before transferring. This rule exists because transfers are often a bad deal — you're giving up a guaranteed income for investment risk. The FCA and pension regulators have consistently warned that transferring out is rarely in a member's best interest.

There are circumstances where a transfer may make sense: serious ill health, no dependants, a particularly generous transfer value, or a desire to pass assets on through inheritance. But these are exceptions, not the rule.

SECTION: How to Find Lost DB Pensions
If you've had multiple jobs over the years, you may have deferred DB pensions you've lost track of. Contact the Pension Tracing Service at gov.uk/find-pension-contact-details. You'll need the name of your former employer or scheme, and the service will provide contact details for the scheme administrator.

SECTION: SimpleMoney Verdict
If you have a defined benefit pension, protect it. For most people, it is far more valuable than it appears on paper because of the guaranteed income, inflation protection, and survivor benefits it provides. Don't transfer it without taking regulated financial advice — and approach that advice with healthy scepticism if the adviser recommends a transfer, as they earn commission on the transfer that they don't earn if you stay in the scheme.