Defined Benefit Pension Guide UK 2025: Final Salary, CARE & Transfer Values

What Is a Defined Benefit Pension?

A defined benefit (DB) pension is a retirement scheme in which the income you receive at retirement is determined in advance by a fixed formula — not by how much money happens to be in a pot when you retire. This is the crucial distinction from defined contribution (DC) pensions, where your retirement income depends entirely on contribution amounts and investment performance.

With a DB pension, the employer bears the investment risk. If the scheme's investments underperform, the employer must top up the funding to ensure the promised benefits can be paid. This makes DB pensions extraordinarily valuable — and increasingly expensive for employers to provide.

As a result, DB pensions are now rare in the private sector. Most large employers closed their DB schemes to new members between 2000 and 2015, replacing them with DC schemes. However, DB pensions remain the standard in the public sector. NHS employees, teachers, civil servants, police officers, firefighters, and armed forces personnel all have access to DB pension schemes in 2025.

If you have a DB pension from any point in your career, it is one of the most valuable financial assets you own. Understanding how it works is essential for effective retirement planning.

Final Salary vs Career Average (CARE) Pensions

There are two main types of defined benefit pension scheme:

Final Salary Pensions

The pension is based on your salary at or near retirement (or when you left the scheme). This is the traditional DB structure, common in older schemes. Your benefit is calculated using:

Annual pension = Accrual rate x Years of service x Final pensionable salary

Example: 1/60th accrual, 30 years service, final salary £50,000 = 30/60 x £50,000 = £25,000/year

Final salary pensions are particularly valuable for those whose salaries increase significantly over their career, since the entire benefit is linked to the higher final salary.

Career Average Revalued Earnings (CARE) Pensions

CARE pensions calculate benefits based on your average salary throughout your scheme membership, with each year's accrued benefit revalued annually (typically by CPI or a fixed rate). Most public sector pensions reformed to CARE structures between 2014 and 2022.

Annual pension = Sum of (Accrual rate x Pensionable pay for each year), revalued annually

CARE pensions are generally considered fairer, as they do not skew benefits towards those who receive large salary increases late in their career. For those with flat or modest salary progression, CARE can actually be more valuable than final salary, as earlier years' benefits are revalued by a guaranteed index each year.

Key UK Public Sector Pension Schemes 2025

Accrual Rates and How to Calculate Your Pension

The accrual rate is the fraction of your salary you earn as a pension entitlement for each year of service. It is the central mechanism of a DB pension calculation.

Common Accrual Rates

• 1/60th: Classic private sector final salary — 40 years gives 40/60 = two-thirds of salary
• 1/80th: Older public sector schemes — typically comes with a tax-free lump sum (3x the pension)
• 1/57th: Teachers' Pension Scheme (2015)
• 1/54th: NHS Pension Scheme (2015) — one of the most generous accrual rates
• 1/49th: Local Government Pension Scheme

Indexation: Inflation Protection in DB Pensions

One of the most valuable features of a DB pension is the built-in inflation protection. Most DB pensions are indexed — meaning the annual pension income increases each year in line with an inflation measure, protecting your purchasing power throughout retirement.

Indexation Rules

The level of inflation protection depends on when the pension was accrued and whether it is a public or private sector scheme:

For public sector schemes, pension income increases by the full September CPI figure each year (announced in October, applied April). For a pension of £20,000/year, a 3% CPI increase adds £600/year — compounding over a 25-year retirement, this protection is worth a substantial additional sum compared to a fixed annuity.

Cash Equivalent Transfer Value (CETV)

The Cash Equivalent Transfer Value (CETV) is the actuarially calculated lump sum that the pension scheme offers if you choose to transfer out of the DB scheme into a personal pension or SIPP. It represents the scheme's estimate of how much money would be needed to replicate your DB entitlement through other means.

How CETVs Are Calculated

CETVs are calculated by scheme actuaries using several key assumptions:

• Projected annual pension: Your DB benefit at normal pension age
• Life expectancy: How long you are expected to draw the pension (based on standard mortality tables)
• Gilt yields: The CETV is heavily influenced by current gilt (government bond) yields — higher yields produce lower CETVs, lower yields produce higher CETVs
• Inflation assumptions: Expected future inflation affects the value of indexed benefits
• Scheme-specific factors: Each scheme's actuary applies their own assumptions within regulatory guidelines

CETV Multiples in 2025

In 2025, typical CETV multiples — the ratio of the CETV to the annual pension — have moderated compared to the record highs seen in 2020-2021 when gilt yields were extremely low. Current typical multiples:

Critical note: The CETV is a one-off, take-it-or-leave-it value. Once you transfer out, you give up your DB pension entitlement permanently. You cannot transfer back. This is why the decision requires such careful consideration and, if the CETV exceeds £30,000, regulated financial advice.

Lifetime Allowance Abolished: April 2024 Changes

The lifetime allowance (LTA) — which had imposed an additional tax charge on pension savings above a set threshold — was abolished with effect from 6 April 2024. This was one of the most significant pension tax changes in decades.

What the LTA Was

Before April 2024, the LTA set a limit on the total amount of pension benefits you could accrue without triggering a tax charge. The LTA was £1,073,100 for 2023/24. For DB pensions, the LTA was measured as 20 times your annual pension plus any lump sum.

A £53,655/year DB pension would use the entire LTA (£53,655 x 20 = £1,073,100). Benefits above this triggered an additional tax charge (previously 25% on lump sums, 55% if taken as a lump sum instead of income).

What Changed in April 2024

• The LTA charge was removed from 6 April 2023 (transitional year)
• The LTA itself was formally abolished from 6 April 2024
• There is no longer any limit on total pension accumulation
• However, the Lump Sum Allowance (LSA) of £268,275 now caps the total tax-free cash you can take across all pension schemes in your lifetime
• There is also a Lump Sum and Death Benefit Allowance (LSDBA) of £1,073,100 covering certain lump sums paid on death

LTA Protections After April 2024

Individuals who held Enhanced Protection, Primary Protection, Fixed Protection 2012/2014/2016, or Individual Protection 2014/2016 may still have higher tax-free cash entitlements based on their protected amounts. These protections continue to be relevant even after LTA abolition — seek specialist advice if you have any form of LTA protection.

When Can You Take Your DB Pension?

Most DB schemes have a Normal Pension Age (NPA) — the age at which you can draw your full entitlement without reduction. The NPA varies by scheme:

• Many private sector schemes: NPA 65
• Public sector schemes reformed after 2015: NPA = State Pension Age (currently 66, rising to 67 by 2028)
• Police and firefighters' schemes: NPA 60 (reflecting the physical demands of the role)
• Armed forces: Immediate pension after 20 years service (for those in certain schemes)

Early Retirement and Reduction Factors

You can usually draw your DB pension early — from age 55 (rising to 57 in April 2028, with some scheme exceptions). However, taking the pension early means:

• The pension will be paid for longer, so an early retirement factor reduces the annual amount
• Typical reduction: 4-6% per year taken early, depending on the scheme's actuarial assumptions
• Example: Taking a pension 5 years early with a 5%/year reduction factor = 25% reduction in annual income
• This reduced pension is then paid for the rest of your life — so the earlier you retire, the more important it is to understand the reduction

Late Retirement

Conversely, deferring your DB pension beyond the NPA typically results in an increased annual amount — an actuarial increase to compensate for the shorter expected payment period. Check your scheme's rules for the specific enhancement rate.

2028 Change: Minimum Pension Age Rising to 57

From April 2028, the minimum age at which most workers can access any pension (DB or DC) rises from 55 to 57. Some public sector workers with a Protected Pension Age (such as uniformed services personnel) may retain their right to access at 55 if they joined before a specified date. Check your scheme's specific protected pension age provisions.

Protected Public Sector Schemes: Enhanced Benefits

Certain public sector workers benefit from particularly valuable DB pension provisions, reflecting the nature and demands of their work:

NHS Pension Scheme

One of the largest public sector schemes, covering over 1.5 million active members. The 2015 section (CARE) uses a 1/54th accrual rate — one of the most generous in any UK scheme. NHS members also benefit from Ill Health Retirement provisions, death in service benefits, and dependants' pensions.

Police and Firefighters

Police and firefighters have historically had earlier Normal Pension Ages (NPA 60) due to the physical demands of the role, and can access some pensions from age 50 under older scheme rules. The 2015 reformed schemes moved to NPA 60 with CARE structures but retained earlier access than most public sector workers.

Armed Forces

The Armed Forces Pension Scheme 2015 (AFPS 15) provides a pension payable immediately on retirement after 20 years of qualifying service, regardless of age. This reflects the shorter service careers typical in the military.

Teacher's Pension Scheme

Over 700,000 active members in England and Wales. The 2015 section uses a 1/57th accrual rate with NPA equal to State Pension Age. Teachers who joined before 2012 may have benefits under the older final salary structure preserved under transitional protections.

Should You Transfer Your Defined Benefit Pension?

This is one of the most important pension decisions you will ever make, and it is largely irreversible. The regulator-stated starting position — supported by extensive academic research — is that transferring a DB pension is unlikely to be in most people's best interests. Here is why, and when exceptions might apply.

The Regulatory Framework

If your CETV exceeds £30,000, you are legally required to take regulated financial advice from an FCA-authorised pension transfer specialist (PTS) before the scheme can execute the transfer. This legal requirement exists precisely because of the risk that individuals might transfer away highly valuable benefits for short-term reasons.

Since 2021, many financial advisers have left the DB transfer market due to the high professional indemnity insurance costs and regulatory scrutiny. If you are seeking advice, use the FCA Register (register.fca.org.uk) to find a regulated PTS.

Why Keeping the DB Pension Is Usually Better

• Guaranteed income for life: No investment risk — you know exactly what you will receive
• Inflation protection: Annual increases maintain purchasing power
• Longevity protection: The longer you live, the more valuable the DB pension becomes versus a fixed pot
• Dependants' pension: Most DB schemes pay 50% of your pension to a surviving spouse or civil partner
• Scheme solvency protection: Pension Protection Fund backs eligible schemes if the employer fails

Circumstances Where Transfer Might Be Considered

• Seriously ill health: If your life expectancy is significantly shorter than average, a lump sum may provide more total income and greater flexibility for your estate
• No financial dependants: If you have no spouse, civil partner, or children who would benefit from a dependant's pension
• Small pot size: Very small DB pensions (e.g., just a few years' service in a lower-paying role) may not justify the administrative complexity
• Scheme-specific risks: In very rare cases, concerns about scheme funding and employer covenant may be relevant — though the PPF provides a backstop
• Strong preference for flexibility: Some individuals strongly prefer DC flexibility (Pension Freedoms, inheritance options), though this comes at the cost of guaranteed income

The CETV Decision: A Framework

When evaluating a transfer, calculate your critical yield — the investment return the transferred pot would need to achieve to match the DB income for life. If the critical yield is above 5-6% per year, the transfer is unlikely to be in your best interests for most individuals. In 2025, with CETVs lower than peak 2021 levels, critical yields are often 6-8% or more.

Pension Protection Fund: Your Safety Net

The Pension Protection Fund (PPF) is the UK's DB pension lifeboat. If your employer becomes insolvent and the pension scheme has insufficient assets to meet its obligations, the PPF steps in to pay compensation.

PPF Compensation Levels

PPF pensions in payment are indexed by CPI (capped at 2.5% per year) for benefits accrued after 1997. Pre-1997 accrual is not legally required to increase, though the PPF may do so at its discretion.

The PPF is funded by levies on all eligible DB schemes and by assets taken over from schemes that enter the PPF. As of 2025, the PPF has a funding surplus and protects over 400,000 members from schemes that have entered its care.

Frequently Asked Questions