What is a defined benefit pension?

This type of scheme is one where the employer takes on the responsibility for the financial security of the fund that underpins the income. From a member’s perspective, the income is guaranteed and they do not need to consider investment performance. If the sponsoring employer is unable to meet their obligations, the Pension Protection Fund (PPF) may step in to continue to provide income benefits, albeit on a reduced basis.

From a tax perspective, actual contributions into these types of arrangement are largely irrelevant, with the annual allowance impact worked out by the increase in guaranteed pension at the point of retirement.  This can be a complex calculation, but generally it means that the real (i.e. post-inflation) increase in entitlement is multiplied by 16.  The actual amount paid in to the pension is based on actuarial calculations which account for the current value of the scheme and the required discounted value of the various guarantees that have been promised to members.