Is a final salary pension better? Not for everyone: it pays a guaranteed income, while a defined contribution pot offers choice and investment risk.

Which one suits a person depends on their health, other income, family and the scheme's own rules, so this guide sets the two side by side and recommends neither. MoneyHelper, which offers free, impartial help, has pension specialists who answer questions. Want it checked against your own circumstances? Pensions, health and plans get weighed together when an FCA-authorised adviser rings, free, in reply to the form on this page.

Final salary or defined contribution: is a final salary pension better?

Neither is better for everyone, because they trade certainty for choice and each carries a risk the other does not. A final salary pension is one of two kinds of defined benefit (DB) pension, the other being career average. In the FCA's words: "A DB pension is sometimes called a final salary pension. It gives you a guaranteed lifetime income that usually increases each year to protect you against inflation." A defined contribution (DC) pension, by contrast, builds a pot that you invest, and the same page says its value moves with how those investments perform, up as well as down.

Final salary (defined benefit)Defined contribution
What you getAn income worked out from your pay and years of membershipA pot of money, built from contributions and investment returns
Who carries the investment riskThe employer is responsible for making sure there is enough moneyYou do: the value can rise or fall until you take the money
Keeping up with pricesUsually increases each yearDepends on how the pot is invested, or on any annuity you buy
When you dieThe scheme decides what a partner or dependants receiveThe pot can usually pass to the people you nominate
If the firm behind it failsPension Protection Fund, for eligible schemesFinancial Services Compensation Scheme may compensate, if the provider was authorised and the conditions are met

The sections below take each row in turn. If you are unsure which kind you have, working out which type you have shows where to look, and the final salary pension guide explains how the amount is worked out.

Guaranteed income or investment risk: who carries the risk?

In a final salary scheme the employer carries it; in a defined contribution pension you do. GOV.UK says the employer carries the duty to see that a defined benefit pension has the funds for every member's promised amount, and that the employer cannot touch that money if it falls into financial trouble. What the member gets is an income for life, normally paid monthly, set by salary and years of membership.

With a pot, nobody promises the outcome. Its size at retirement, according to MoneyHelper, turns on four things: the money going in (employer contributions and tax relief included), the number of years you save, investment performance, and the provider's charges and fees. The money is invested in the hope of growth, yet its value can go up or down right up to the point you draw it, and as with any investment there is a risk of getting back less than you put in. The FCA adds that a DC pot has to be managed and invested, with the cost deducted from it, and that a pot may run out of money in your lifetime.

Defined benefit schemes also have to be funded. The Pensions Regulator's funding code says every DB scheme is subject to a statutory funding objective: to have sufficient and appropriate assets to cover its technical provisions.

Not every defined benefit scheme is equally generous. A final salary scheme takes a fraction of your last salary, known as the accrual rate, and multiplies it by your years of membership; what counts as pensionable pay varies from scheme to scheme. Your own scheme's fraction and rules are something the adviser who calls after this page's short form can talk you through.

A pot can be turned into a guaranteed income by buying an annuity, but that is a purchase made at the rates on offer on the day, covered in the annuity guide. Starting early carries a cost in a final salary scheme too: where a scheme permits an early start, the income is typically smaller than the one it promised.

Which keeps up with inflation better?

A final salary pension usually has yearly increases built in, while a pot has no such feature unless you buy one. The FCA describes yearly rises as the usual protection against inflation in a DB pension, and MoneyHelper says the pension usually increases every year once you are receiving it, and usually rises after you leave the scheme too. How much each scheme adds, and whether the rise is capped, differs; do final salary pensions increase? sets out the rules.

A DC pot has no automatic rise: it grows or shrinks with its investments. Turning it into an annuity brings a choice, and MoneyHelper explains that annuity income can stay level or increase each year, either by a set rate or alongside inflation, though sometimes capped. Picking a level income usually means bigger payments at the outset, so a pot can become an income that rises with prices, but normally from a lower first payment.

What do a partner or family get when you die?

Both can pass something on, in different ways. MoneyHelper says a defined benefit pension leaves no pot behind: the scheme decides what is paid, and typical examples are a dependant's pension for a partner or for children up to age 23. GOV.UK's guidance on inherited pensions is narrower still: a pension from a defined benefit scheme is usually payable only to someone who was the member's dependant, with a husband, wife, civil partner or a child under 23 given as examples. Before retirement, a refund of the contributions you paid, with interest, might be paid instead.

A DC pot can usually be passed to beneficiaries you choose, who may be able to take it as a lump sum, buy an annuity or use drawdown, depending on the scheme's rules. An annuity bought with a pot usually stops when you die unless you chose options such as a joint-life basis. The details, including tax on what is inherited, are in how pension death benefits work, and final salary pensions on death covers the defined benefit side.

Flexibility: what can you do with each when you retire?

A defined contribution pot is the more flexible of the two, and the extra choice comes with extra decisions. MoneyHelper lists the choices at 55 (57 from April 2028), unless you retire early due to poor health: tax-free cash, then leaving the rest invested, turning some into guaranteed income, drawing a flexible income you can vary or stop, or taking lump sums. It also warns that the way you take the money could affect your income for decades. Pension Wise is the guidance service GOV.UK lists for people in defined contribution schemes; what Pension Wise is explains it, and defined contribution options at retirement goes through each choice.

A final salary pension is narrower by design. GOV.UK says that in a defined benefit scheme you may be able to take some money tax-free as a lump sum, and get what is left as a guaranteed annual amount; the scheme can confirm whether it applies. In some schemes, a lump sum is paid for with a smaller pension afterwards. Starting age, lump sum terms and any early or late retirement adjustments are covered in the choices at retirement. Whether you can use drawdown without leaving the scheme is answered in final salary pensions and drawdown.

Pension Protection Fund vs FSCS: what if the employer or provider fails?

They are different safety nets for different failures. The Pension Protection Fund (PPF) steps in for eligible defined benefit schemes when the employer becomes insolvent and the scheme cannot pay what it promised; the Financial Services Compensation Scheme (FSCS) may compensate when an authorised pension provider fails, subject to its conditions.

For a DB pension, GOV.UK says the PPF usually protects members when an insolvent employer leaves the pension unpaid, and that its usual compensation is 100% at or over the scheme's pension age and 90% under it. The PPF says it does not protect defined contribution schemes or public sector schemes. The Pension Protection Fund explained and are final salary pensions protected? cover the limits.

For a DC pension, GOV.UK explains that a pot is not lost when the employer fails, since providers rather than employers usually run these pensions, and that the FSCS can compensate where an FCA-authorised provider cannot pay. The FSCS's own page adds conditions. It generally protects pensions from UK-regulated insurers that count as contracts of long-term insurance, and where the provider failed after 1 April 2019 it can normally pay 100% of the claim with no upper limit. The limit is £85,000 per eligible person, per firm, where the provider was a SIPP operator or a firm gave bad pension advice. Occupational schemes that fail are outside its protection, it says, though the PPF may cover them. Where a trust runs a DC scheme and the employer goes out of business, members still get their pension, but possibly less, because the running costs then come out of members' pots instead of the employer's pocket.

Moving from final salary to defined contribution: what the FCA says

The regulators start from keeping what you have. The FCA's consumer page states: "The FCA and The Pensions Regulator (TPR) believe it’s in most people’s best interests to keep their DB pension. You can’t reverse a transfer, so you need to make sure you understand the risks so you can make an informed decision." Its list of what a transfer would mean:

  • giving up the guaranteed income for life, including what it would pay dependants;
  • losing the scheme's protection against rising prices;
  • paying a DC scheme and investment managers, deducted from the pot;
  • having to decide how to invest, or paying someone to do it;
  • a pot that may fall as well as rise, and that may run out of money in your lifetime.

The same page says that someone who moves because they fear the employer might fail would lose the PPF's protection for eligible schemes. It also describes circumstances where a transfer may be suitable, such as having other sources of retirement income, or a limited life expectancy with a wish to leave the family financially secure, and says anyone considering one should get financial advice. Regulation 5 of SI 2015/742 lifts the trustees' duty to confirm appropriate independent advice was taken where safeguarded benefits have a transfer value no higher than £30,000 on the valuation date; above that figure, the check applies (the advice requirement explains it). Members of unfunded public sector schemes such as the Teachers' Pension Scheme can only transfer to another defined benefit scheme, according to MoneyHelper; see can I transfer my Teachers' Pension? The wider weighing of risks and reasons is on its own page.

Setting the two against your real figures is more than a guide can do. Ask in the form here for a call-back, and the person who rings, an FCA-authorised adviser, can take pots, State Pension and family together; nothing is owed.

Pros and cons of final salary and defined contribution: what people also ask

What are the downsides of a final salary pension?

MoneyHelper points to three: there is no pot to leave behind when you die, some schemes cut the later income if you take a lump sum, and an early start typically brings less than the promised income. The FCA adds that a transfer out cannot be reversed.

What are the downsides of a defined contribution pension?

Nothing guarantees the outcome. According to MoneyHelper, the pot can shrink as well as grow before you draw on it, and the provider's charges and fees affect what is left. You also have to choose how to invest and how to draw income, which the FCA lists among the risks of moving from DB to DC.

Is a career average pension the same as final salary?

No, though both are defined benefit. MoneyHelper says career average pensions are based on an average of your salary from joining to leaving or retiring, while final salary pensions are based on what you are paid when you stop work or leave the scheme.

What is a hybrid or cash balance pension?

GOV.UK describes a hybrid pension as a mixture of defined benefit and defined contribution pensions. MoneyHelper says cash balance plans are a type of DC scheme that also include a guaranteed minimum pot value or a guaranteed percentage of pay built up for each year of service. Your scheme's documents show which applies.

How do I find out which type I have?

MoneyHelper says to check your paperwork or ask your pension scheme provider, and it offers a tool for finding your pension type. The final salary check lists where to look.

Weighing the two for your own case

A final salary pension offers a promised income, usually rising and usually continuing for a partner or dependants, with a safety net if the employer fails. A defined contribution pension offers choice and a pot that can be passed on, with the outcome depending on investments, charges and your decisions. Whether a particular scheme beats a particular pot depends on the figures and on your plans, and that is a conversation to have with a person who can see them. Should you want this worked through with your figures, request a call-back through the page's form; talking to the FCA-authorised adviser costs nothing. For background, see what a final salary pension is and do final salary pensions still exist?

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