How your defined benefit pension supports you in retirement

A defined benefit pension provides a guaranteed income that lasts throughout your retirement, giving you the financial stability to plan ahead with confidence.

In this guide, we'll explore how defined benefit pensions work in practice during retirement, the support they provide, and how they help you maintain financial wellbeing for the years ahead.

If you have a pension insured by Canada Life, you can find out more about your pension here.

How your defined benefit pension works

Defined benefit pensions aren’t the most common type of pension today, but they remain a valuable option for a comfortable retirement, should your employer offer one. 

Unlike defined contribution pensions, where the amount you get depends on how much you've saved and how your investments perform, a defined benefit pension pays you a guaranteed income on a regular basis, usually monthly.

Your payments start when you take your defined benefit pension and usually continue for life, although it’s worth checking the rules of your scheme.

What is defined benefit pension income based on?

Your defined benefit pension income is based on three main factors:

• Your pensionable salary (either your final salary or career average)
• Your years of service
• The scheme’s accrual rate

How is your pension income calculated?

The scheme sets the rules for how your income is worked out and when you can take it. This is typically worked out using a simple formula based on your years of service, accrual rate and pensionable salary:

Years of service ÷ accrual rate × pensionable salary = annual pension

For more detailed information and a practical example, read How is defined benefit income calculated?

How defined benefit pensions support you in retirement

A defined benefit pension provides several important benefits that help support your financial security throughout retirement.

Guaranteed income for life

One of the most valuable features of a defined benefit pension is that it provides a predictable income you can rely on. Unlike defined contribution pensions, where you need to manage your pot carefully to avoid running out of money, a defined benefit pension is designed to pay you an income for the rest of your life.

This certainty makes it easier to budget and plan for the future. You'll know exactly what's coming in each month, helping you make confident decisions about your spending and lifestyle in retirement.

Learn more about the difference between defined benefit pensions and defined contribution pensions.

Protection against inflation

Most defined benefit pensions increase each year to help protect your income against rising prices. How your pension increases depends on your scheme, but many link to inflation measures such as the Consumer Prices Index (CPI), often with a cap on the maximum annual increase.

These annual increases mean your pension maintains more of its purchasing power over time. Without them, what seems like a comfortable income today could feel tight in 10 or 20 years as the cost of everyday expenses rises.

Support for your spouse or partner

If you die, your defined benefit pension scheme often continues to pay a reduced pension to your spouse, civil partner or dependant. This provides important financial security for your loved ones after you're gone.

The amount they receive and who qualifies varies depending on your scheme's rules. It's a good idea to check your scheme documents or speak with your pension provider to understand exactly what survivor benefits your pension includes.

Employers carry the investment risk

With a defined benefit pension, your employer or insurer is responsible for funding the scheme and ensuring there's enough money to pay everyone's pensions. This means you don't need to worry about how investments perform or whether there will be enough money when you retire.

Your income isn't directly affected by stock market ups and downs, so whatever happens, you'll still receive the same guaranteed amount each month. This removes a significant source of uncertainty and stress that people with defined contribution pensions often face. With a defined contribution pension, the member takes on the investment risk and needs to actively manage their pension pot throughout retirement.

When can I take my defined benefit pension?

Your defined benefit pension comes with a ‘normal retirement age’ set by your scheme.

This is the age at which you can take your pension in full, and it can differ from your State Pension age, which is set by the government.

Some schemes allow you to take your pension earlier, but your income will usually be lower because it’ll be paid for longer. How much lower depends on your scheme’s rules and how early you retire.

Learn more about defined benefit pensions