Defined benefit pension schemes: final salary and career average explained

Defined benefit pensions give you a retirement income based on your salary and how many years you’ve been in the pension scheme. 

They provide a regular income for life, usually in monthly payments. The payments increase each year in line with inflation.  

A defined benefit pension is a workplace pension scheme. Your employer is responsible for making sure there’s enough money to pay your pension income.

You often need to contribute a percentage of your wages, but some schemes will be fully funded by your employer. 

There are two types of defined benefit pension: 

• Career average – these are based on an average of your salary from the time you joined the scheme until you leave or retire.  

• Final salary – these are based on how much you’re paid at the point you stop working for your employer or leave the scheme.

You might have a defined benefit pension if you’ve worked for a large employer or in the public sector.

You can use our tool to find out your pension type. To find out if you have a final salary or career average scheme, check your paperwork or ask your pension scheme provider. 

Career average schemes work out your retirement income using a fraction of your ‘pensionable earnings’ for each year you’re a member of the scheme. This is called an accrual rate. 

Example: If your pensionable earnings were £30,000 over one year and you had an accrual rate of 1/60th, you would typically earn a pension that pays out £500 a year at your scheme’s normal pension age (£30,000 divided by 60).  

Your final pension amount is calculated by adding up the pension benefits you’ve earned for each year you’re a member of the scheme. An extra amount is then added for inflation, so its value shouldn’t decrease over time. 

You’ll need to ask your employer or pension provider what counts as pensionable earnings, as it depends on the scheme. 

For example, some schemes do not count extra earnings such as: 

• overtime 

• commission  

• holiday pay

• bonuses 

• 'benefits in kind’ – like a company car or private medical insurance.

Final salary schemes work out your retirement income using a fraction of the last salary you had at your employer. This is called an accrual rate. The amount is then multiplied by the number of years you were a member.  

Example: If your final pensionable salary was £30,000 and you had an accrual rate of 1/60th, you would typically earn an annual pension worth £500 for each year you were a member (£30,000 divided by 60). If you were a member of the scheme for ten years, your pension would pay out £5,000 a year at your scheme’s normal pension age.  

After you leave the scheme, your pension usually increases by a certain amount each year – so its value doesn’t decrease over time due to inflation. The pension will also usually increase every year once you’re receiving it.  

You might also get a lump sum of money when you retire, in addition to your regular pension income. In some schemes, taking a lump sum reduces the income you’ll get later on. 

These calculations can be complex. You can usually check your statements or ask your employer for details on how they calculate your pension income. 

You can usually take your defined benefit pension when you reach your State Pension ageOpens in a new window 

Some schemes will let you take it earlier but you’ll typically get a lower income than the scheme promised. 

You might be able to take your whole pension as a cash lump sum. If you do this, up to 25% of it will be tax-free, and you’ll have to pay Income Tax on the rest. 

You can take your lump sum from age 55 (57 from 2028) – or earlier if you need to retire early due to poor health – if:

• the total value of all your pension savings, excluding the State Pension, is less than £30,000 

• your defined benefit pension is worth less than £10,000, regardless of how much your other pension savings are.  

Most defined benefit pensions continue to pay a certain amount to your spouse, civil partner or dependants when you die.  

Find out more in our guide What happens to my pension when I die? 

If you’ve lost track of your defined benefit pension and can’t find the paperwork, the free Pension Tracing Service can help you find contact information. 

You can find pension contact detailsOpens in a new window on GOV.UK or see step-by-step help in our guide How to find old or lost pensions.

Transferring out of a defined benefit scheme to a defined contribution scheme might leave you worse off. You can’t reverse a transfer once you’ve made it, so think carefully about your situation first. 

The Financial Conduct Authority (FCA) and the Pensions Regulator (TPR) believe that most people will benefit more from keeping their defined benefit pension. 

If you’re in an ‘unfunded’ public sector pension scheme like the Teachers’ Pension Scheme or NHS Pension Scheme, you can only transfer your pension to another defined benefit scheme.

It’s important to get financial advice if you want to transfer a defined benefit pension. Learn more in our guide How to transfer out of a defined benefit pension.