Defined benefit vs defined contribution pensions
By CareFinder Team · Published 2026-06-30 · Last reviewed 2026-09-18
A defined benefit pension promises a set income for life, worked out from your salary and years in the scheme, and the employer carries the investment risk. A defined contribution pension builds a pot from contributions and investment growth, and you carry the risk: what you get depends on how much was paid in, how investments performed and how you take the money.
The difference comes down to who carries the risk. A defined benefit pension, often called a final salary or career average scheme, promises you a set income for life based on your pay and years of service, and your employer must make sure there is enough money to pay it. A defined contribution pension builds up a pot of money, and what you end up with depends on contributions, investment growth and how you choose to take it.
Many people have both: a defined benefit pension from an older job and one or more defined contribution pots from later jobs or auto-enrolment.
What is a defined benefit pension?
A defined benefit (DB) pension pays a guaranteed income from the scheme's pension age until death. The amount is worked out using a formula set by the scheme, usually based on:
- How many years you were a member
- Your salary, either at or near the end of membership (final salary) or averaged over your career (career average)
- The scheme's accrual rate, such as a fraction of salary for each year of membership
Most DB pensions also rise each year in payment, in line with the scheme rules, and many pay a pension to a surviving spouse or partner. You can usually take part of the pension as a tax-free lump sum in exchange for a lower yearly income.
DB schemes are now mainly found in the public sector, such as the NHS, teachers' and local government schemes, and in older private-sector schemes, most of which have closed to new members.
What is a defined contribution pension?
A defined contribution (DC) pension, also called a money purchase pension, is a pot of money. You, your employer and tax relief pay in, and the money is invested. Most auto-enrolment workplace pensions and personal pensions are DC.
What you get depends on:
- How much was paid in
- How the investments performed, which can go up or down
- Charges taken by the provider
- How you decide to take your money
GOV.UK explains the main ways to take a DC pot: as cash lump sums, by buying an annuity for a guaranteed income, or through flexi-access drawdown, where the pot stays invested and you take income as you need it. You can usually take up to 25% tax-free, up to a lifetime lump sum allowance; the rest is taxed as income.
How do the two types compare?
| Feature | Defined benefit | Defined contribution |
|---|---|---|
| What is promised | A set income for life | A pot of money |
| Who carries investment risk | The employer | You |
| Income in retirement | Guaranteed, usually rising each year | Depends on the pot and your choices |
| Flexibility | Low: paid as the scheme rules say | High: cash, annuity, drawdown or a mix |
| Protection if things go wrong | Pension Protection Fund | Financial Services Compensation Scheme |
| Spouse or partner benefits | Usually built in | Depends on how you take the pot |
What happens if the employer or provider fails?
According to GOV.UK's page on pension protection:
- DB schemes: if the employer becomes insolvent and the scheme cannot pay, the Pension Protection Fund usually pays 100% compensation if you have reached the scheme's pension age, or 90% if you have not, subject to its rules.
- DC schemes: if the pension provider fails, you may be able to claim from the Financial Services Compensation Scheme.
When can you take your pension?
For most DC pensions, the earliest age is currently 55. The government has legislated to raise this normal minimum pension age to 57 from 6 April 2028, with some members protected. DB schemes set their own normal pension age, and taking the pension earlier usually means a reduced amount.
Should you transfer a defined benefit pension?
It is possible to transfer out of most private DB schemes into a DC pension, but you give up a guaranteed income for life in exchange for a pot that can run out. Public service schemes that are unfunded, such as the NHS and teachers' schemes, usually cannot be transferred to a DC pension.
If your DB benefits are worth £30,000 or more, the scheme must check that you have taken appropriate independent advice from an adviser authorised by the Financial Conduct Authority before a transfer can go ahead. Be very wary of anyone who contacts you out of the blue about transferring: cold calling about pensions is illegal.
How does each type affect care costs and inheritance?
**Care financial assessment (England).** Pension income is usually counted when a council works out what someone should pay towards care. A DB pension in payment is counted as income. For a DC pot, the council looks at what is actually being drawn; if someone over Pension Credit age is drawing little or nothing, the council can treat them as having the income an annuity could provide. Money taken out of a pot and kept in the bank is treated as savings.
Inheritance Tax. From 6 April 2027, most unused pension funds and death benefits will be counted in a person's estate for Inheritance Tax, according to HMRC's policy paper. Dependants' scheme pensions from DB schemes are excluded.
This article is general information. For free, impartial guidance on your options, use Pension Wise if you are 50 or over and have a DC pension. For a personal recommendation, speak to a regulated financial adviser.
Frequently asked questions
How do I know which type of pension I have?
Check your annual statement or ask the scheme. A statement showing a pot value is usually DC; one showing a yearly pension amount based on service is usually DB. Some older schemes are hybrids with elements of both.
Is a defined benefit pension always better?
For most people, a DB pension is very valuable because it gives a guaranteed, usually rising income for life and the employer carries the risk. A DC pot is more flexible, which can suit some circumstances, but it can run out if withdrawals are too high or investments fall.
Can I take a tax-free lump sum from a defined benefit pension?
Usually, yes. Many DB schemes let you swap part of your yearly pension for a tax-free lump sum. The scheme will tell you the rate at which pension is exchanged for cash.
What happens to my pension when I die?
A DB scheme usually pays a pension to a surviving spouse or civil partner, and sometimes to dependants. A DC pot can usually be passed on to the people you nominate. Keep your nomination form up to date with each scheme.
Key takeaways
- Defined benefit pensions promise a set income for life; the employer carries the risk.
- Defined contribution pensions are pots whose value depends on contributions, investments and choices.
- DB schemes are backed by the Pension Protection Fund; DC providers by the FSCS.
- The minimum age for taking most pensions rises from 55 to 57 from 6 April 2028.
- Transferring out of a DB scheme worth £30,000 or more requires regulated advice.
- From April 2027, most unused pension funds count towards Inheritance Tax.