A defined benefit pension pays out a secure income for life. Its value is based on the how long you have worked for a company and the salary you have earned. This type of pension is sometimes referred to as a ‘final salary’ or ‘career average’ pension scheme.
A Defined Benefit (DB) pension scheme is a type of workplace pension that pays you a secure retirement income for life. This type of pension is usually offered by larger employers or companies in the public sector.
A DB pension is based on your salary and the number of years you have worked for the employer. The salary that you are paid also increases each year making them one of the more favoured pension schemes.
Not only does your employer contribute to the scheme, they are also responsible for ensuring there is enough money in your pension fund when you retire.
A DB pension scheme has a big advantage over a DC plan as it provides a guaranteed salary for life. This annual salary increases year-on-year making them more attractive than other types of pension which doesn’t come with a guaranteed figure.
Another benefit to a DB pension is the financial security it can provide to your family when you die. Moneyadviceservice.org.uk explains: “They (DB pension scheme) usually continue to pay a pension to your spouse, civil partner or dependants when you die.”
It’s not usually advised to transfer a DB pension scheme because of all of the benefits they provide. When you transfer, all benefits of your current scheme are lost and only the value is carried over.
If you’re considering transferring a DB pension away from the UK it is strongly recommended that you speak to a financial advisor before making any decisions. If you would like to transfer a DB pension pot of more than £30,000 then you’ll need this to be signed off by a regulated financial adviser. This adviser needs to hold specialist qualifications in pension transfers.
Holborn’s local advisers in Cyprus hold all of these relevant qualifications and can guide you through the process, get in touch to find out more.
With life expectancy going up, the cost of paying someone a salary for life is putting a strain on DB pension schemes. This is one of the reasons DB pensions are becoming rarer and some of the schemes have insufficient funds.
To protect pension schemes, the UK government introduced the Pension Protection Fund (PPF). If your pension is currently in the UK, the PPF is there to cover any potential losses. If the company or employer who your DB pension is with goes out of business, the PPF will protect your pension pot and ensure you receive your annual retirement salary.
Most people with a DB pension want to know how much they will receive when the pension starts to pay out.
This will depend on:
One formula used to calculate your yearly DB pension income is to multiply the number of years you have been with the scheme by your pensionable salary and multiply that number by the accrual rate.
For example, if you had been with a scheme for 10 years with a pensionable income of £24k per year and an accrual rate of 1/60, the calculation would be: (10 x 24,000) x (1/60) = £4,000 a year DB pension income.
If you did choose to transfer a DB pension you would need to speak to your employer to find out the cash equivalent.
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