How workplace pensions work

Your workplace pension is, for most people, the single biggest driver of their retirement income. The State Pension provides a basic floor (more on that in our State Pension guide), but the difference between getting by and living the retirement you actually want usually comes from the pension scheme set up by your employer.

The trouble is that “workplace pension” covers two very different things. The choices you have, the risks you carry, and what your future income looks like depend heavily on which one you’re in.

The two types of workplace pension

There are two main kinds of workplace pension schemes in the UK: defined benefit (DB) and defined contribution (DC). They both involve you and your employer paying in while you work, but the way they pay out in retirement is fundamentally different.

Feature	Defined benefit (DB)	Defined contribution (DC)
What’s “defined”	The income you’ll get in retirement	The contributions going in
Who carries the investment risk	Your employer (and the scheme)	You
Retirement outcome	A guaranteed income for life, usually inflation-linked	A pension pot you choose how to use
Typical scheme name	Final salary or career average	Auto-enrolment workplace pension, group personal pension
Most common in	Public sector, older private-sector schemes	Most private-sector employers today
Earliest access age	Often 60+ (set by scheme rules)	55, rising to 57 from 2028

Defined benefit (DB) pensions

A DB pension promises you a specific income in retirement, based on:

Your salary (final salary or an average across your career)
The number of years you’ve been in the scheme (your “pensionable service”)
An accrual rate: the fraction of salary you build up each year

A simple example: if your scheme has a 1/60 accrual rate and you’ve worked there for 30 years on a final pensionable salary of £45,000, you’d get 30/60 × £45,000 = £22,500 a year for life, usually rising each year in line with inflation up to a cap.

DB schemes are sometimes called “gold-plated” because:

The income is guaranteed for life
It’s usually inflation-linked
It often pays a survivor’s pension (typically 50%) to a spouse or partner if you die
You don’t have to make any investment decisions

The trade-off is flexibility. The income is fixed by the scheme’s rules, you can’t typically draw more or less in any given year, and the earliest you can usually take benefits is whatever the scheme’s normal retirement age is (often 60 or 65).

DB schemes are becoming rarer in the private sector but are still the norm in the public sector (NHS, Teachers’, LGPS, Civil Service, Armed Forces, Police, Firefighters).

Defined contribution (DC) pensions

A DC pension is a pot of money that you and your employer pay into. The size of that pot at retirement depends on three things:

How much you and your employer contribute
How long it’s invested for
How the underlying investments perform (net of fees)

At retirement, you choose what to do with the pot: take 25% tax-free cash, draw down flexibly, buy an annuity, or some combination.

Virtually every private-sector workplace pension set up in the last 15 years is DC. Under auto-enrolment, the minimum contribution is 8% of qualifying earnings (typically at least 5% from you and 3% from your employer) though many employers offer more, and some will match additional contributions you make.

DC pensions are flexible but the risk sits with you: poor returns, high fees, or low contributions all directly reduce the pot you retire on.

Can you have both?

Yes and plenty of people do. If you’ve worked across sectors or had a long career, you may have a DB pension from one employer, a DC pension at another, and old DC pots from earlier jobs sitting with various providers. (You can also run a SIPP alongside either of them.)

How do I understand what my future benefit is?

Wherever you’ve worked, your scheme is legally required to send you an annual benefit statement. That’s a useful document to dig into. What you’re looking for depends on which type of pension you have.

If you have a DB pension

Your DB statement should show:

Accrued pension to date. The annual income you’ve already earned based on your service so far, expressed in today’s money.
Projected pension at normal retirement age. What your annual income could be if you stay in the scheme until your scheme’s retirement age.
Lump sum entitlement. Some schemes show a tax-free lump sum already built in (especially older public-sector schemes); others show only an income figure.
Death benefits. Typically a spouse’s or dependant’s pension, plus a multiple of salary as a lump sum if you die in service.
Cash equivalent transfer value (CETV). The lump sum the scheme would pay if you transferred out (more on this below).

A few sanity checks to run on your DB statement:

Is the inflation link RPI, CPI, or capped? This drives how much your income holds its value across a 25–30-year retirement.
What’s the normal retirement age, and what are the actuarial reductions if you take it earlier?
Is there a survivor’s pension? At what percentage?
Have you had any past pension transfers or pension sharing orders that might affect the figures?

If anything looks off, ask the scheme administrator for an explanatory leaflet or a copy of the member booklet – they’re obliged to share these.

If you have a DC pension

Your DC statement should show:

Current pot value. What you have in there today.
Contributions in the last year. From you, your employer, and any tax relief.
Projected pot at retirement age. A forecast in today’s money (i.e. adjusted for inflation), using assumed investment returns set by the provider.
Projected income. Typically what your pot could provide as an annuity, sometimes alongside a drawdown illustration.
Charges. Ongoing fund and platform costs.

The projection isn’t a promise. It’s a model, and small tweaks to growth or contribution assumptions can produce wildly different outcomes. So treat it as a starting point, not the answer.

To pressure-test your own number:

Compare the projected pot to a rough income target. A common rule of thumb is the 4% rule, which amounts to a pot of around 25× the annual income you want, on top of the State Pension. If you want £20,000 a year from your DC pot, you’re looking at roughly £500,000.
Check your contribution rate. Under auto-enrolment, the minimum is 8% of qualifying earnings, but many people coast at the minimum. Bumping your own contribution (particularly if your employer matches them) can be impactful.
Check the fees. A small annual fee over 40 years can have a huge impact on your final pot. If your workplace scheme is expensive and you’ve left the employer, transferring an old DC pot to a low-cost SIPP can make a meaningful long-term difference.
Find lost pots. The average UK worker has 9 jobs in their career. Use the government’s Pension Tracing Service to track down anything you’ve lost.

Can I convert a portion to current-day benefit?

Yes, but what “converting” means is very different depending on which pension you have.

From a DC pension

This one is simple. From age 55 (rising to 57 in 2028), you can usually:

Take up to 25% of your pot as a tax-free lump sum (the “pension commencement lump sum”, or PCLS).
Take the rest as taxable income, either via drawdown, an annuity, or ad-hoc lump sums.

With a DC pension you can also access the pot in stages, so you don’t have to crystallise the whole thing in one go. That flexibility is one of the main reasons people transfer old DC pots into a SIPP they control.

From a DB pension

There are two routes, and they’re very different.

1. Commutation: swap some income for tax-free cash within the scheme.

Most DB schemes let you give up part of your annual pension at retirement in exchange for a tax-free lump sum. The exchange rate is the scheme’s commutation factor: typically somewhere between 12 and 20 (i.e. each £1 of annual pension payments you give up buys £12–£20 of cash).

A worked example. Say your accrued pension is £22,500 a year, and you want a £50,000 lump sum from a scheme with a commutation factor of 15:

Pension given up: £50,000 ÷ 15 = £3,333 a year
Pension you’d take going forward: £19,167 a year, plus a one-off £50,000 tax-free.

How much you can commute is capped by HMRC rules – broadly, 25% of the value of your benefits, subject to the lump sum allowance (currently £268,275 for most people).

2. Transfer out: take a CETV and move the whole thing into a DC pension.

The other option is to ask for a Cash Equivalent Transfer Value (CETV). This is a lump sum the scheme would pay to move you out of DB entirely and into a DC arrangement (i.e.. a personal pension or SIPP).

A few important rules:

For private-sector DB schemes (and some funded public-sector ones), transfers are usually allowed.
Most unfunded public-sector DB schemes (NHS, Teachers’, Civil Service, Armed Forces) do not allow transfers out.
If your CETV is £30,000 or more, you’re legally required to take advice from an FCA-regulated pension transfer specialist before transferring.
CETVs move with gilt yields. When long-term interest rates rise, CETVs typically fall, and vice versa.

Is that a good idea?

It depends on what you’re trying to do. The answer is different for the two routes.

Commutation: usually a judgement call, not a no-brainer

Swapping a small slice of income for tax-free cash is sometimes a sensible option:

If you have a specific use for the lump sum, like paying off a mortgage, clearing higher-cost debt, helping family, or building a flexible cash buffer for the early years of retirement.
If the scheme’s commutation factor is generous (closer to 20 than 12).
If you have plenty of other guaranteed income (State Pension, other DB pensions, a partner’s pension) so giving up some income won’t make your retirement fragile.

It’s usually a worse deal when:

The commutation factor is low (close to 12). You’re giving up an inflation-linked income for life in return for a relatively small lump sum.
You’re going to spend the cash quickly on lifestyle, rather than invest it or pay down expensive debt.
You don’t have much other income, so you actually need every pound of guaranteed pension.
You’re a couple relying on the survivor’s pension. Commutation can reduce it.

A quick way to sense-check it: divide the lump sum on offer by the income you’d give up. A factor of 20× is generally considered fair; 12× is generally not. Compare that against what a comparable annuity would cost in the open market. If the scheme is offering you significantly less than the market price for that income, commuting is poor value.

Transferring out of DB: rarely the right move

Giving up a guaranteed, inflation-linked, lifetime income to take a lump sum and invest it yourself is a big, generally irreversible decision. The FCA’s starting assumption is that staying in a DB scheme will be in most members’ best interests. For most people, that’s correct.

Transferring out can occasionally make sense if:

You’re in poor health with a reduced life expectancy, where a lump sum and DC inheritance flexibility may be more valuable than a long lifetime income.
You have substantial other guaranteed income and want the flexibility of DC drawdown for a portion of your wealth.
The scheme’s funding position is shaky and unsupported, though even then, the Pension Protection Fund provides a meaningful safety net.
You’re prioritising inheritance. DC pots can be passed to chosen beneficiaries (though from 6 April 2027, most unused pension funds will fall within the scope of inheritance tax, which changes that calculation).

It’s almost never a good idea if:

You’d be relying on the transferred pot as your main source of retirement income.
You’re tempted by a headline CETV that looks large but is actually low relative to the income you’re giving up.
You don’t have the appetite or experience to manage drawdown across 30 years, including in bad market years.

If you do consider it, the FCA-required advice exists for a reason: a regulated pension transfer specialist will model the income you’re giving up, the investment return you’d need to match it, and your wider plan.

Putting it together

A simple way to think about your workplace pension in the context of your wider retirement plan:

Know what you have. Read your most recent statement(s). Note whether each pension is DB or DC, the projected income or pot, and the normal retirement age.
Find anything you’ve lost. Track down old pensions and consolidate the ones it makes sense to combine (DC only).
Maximise the contributions where they’re best value. Capture every penny of employer match in your current workplace DC pension — it’s effectively free money.
Top up where you have headroom. A SIPP is a great complement — it gives you tax relief, full investment choice, and a clean way to consolidate old DC pots.
Be cautious about giving up DB income. Tax-free cash via commutation can be sensible in moderation. Transferring out of DB altogether usually isn’t.

Bring your old workplace pensions together with a fee-free SIPP

The InvestEngine SIPP has zero account fees and accepts transfers from most major UK defined contribution providers.

Explore the InvestEngine SIPP →

ETF costs apply.

Important information

Capital at risk. The value of your portfolio with InvestEngine can go down as well as up and you may get back less than you invest.

This communication is for general information only and should not be considered financial advice. If in doubt, you may wish to consult a professional adviser.

Tax treatment depends on personal circumstances and is subject to change. Before transferring, please review any fees, exit costs and whether your existing investments would need to be sold and reinvested into ETFs.

Click to rate this post!

Total: 0. Average: 0.