Defined Benefit Pensions | Final Salary Pensions

Defined benefit pensions are a pension scheme where the amount you are paid is based on the length of time you have worked for your employer and the salary you have earned. Defined benefit pensions pay a secure income for life which increases each year and is typically offered by large employers or employers in the public sector.

With defined benefit pensions, your employer assumes responsibility for ensuring there is enough money in your pension pot for a comfortable retirement by making contributions to your defined benefit pensions scheme. In many cases employees will have the opportunity to contribute to their defined benefit pension scheme. Depending on the rules of your defined benefit pension your pension or a percentage of it may still be paid to your spouse, civil partner or dependants after your death.

When can you take your defined benefit pensions?

Typically, defined benefit pensions can be taken at 65, when you reach 65 your employer will stop contributions to your pension and your pension starts to be paid out. Depending on your scheme, it may be possible to take your pension from the age of 55, although this will likely reduce the amount you receive. It is also possible in some cases to take your pension without retiring or you may be able to defer taking your pension to a later age, which could result in a higher income when you do take it.

Your defined benefit pension scheme will detail the rules which apply to your scheme, it is good practice to ensure you understand the rules of the scheme before signing up to it and if need be seek professional financial advice. Once your pension payments begin, they will increase each year by a set amount as set out in the rules of your defined benefit pension scheme.

It may be possible to take your defined benefit pension as a lump sum from the age of 55 or earlier if you are seriously ill, if:

• The total value of all your pension savings is less than £30,000
• Your pension is worth less than £10,000, regardless of how much your other pensions are worth. This can be taken for up to three different pensions.

If you do decide to take your pension as a lump sum up to 25% can be taken tax free and you would be liable to pay income tax on the remaining amount.
Protecting your Defined Benefit Pensions

Defined benefit pensions are protected by the Pension Protection Fund. The Pension Protection Fund will pay compensation to scheme members if employers become insolvent and the scheme is unable to pay benefits. The compensation may not cover the full amount and the level of protection offered will depend on whether you are:

• Drawing benefits
• Still contributing to the scheme
• A deferred member who has left the scheme but has built an entitlement