What is a public sector pension?

Teachers, NHS workers, police, firefighters, the armed forces and many other public sector workers have a special kind of workplace pension: the defined benefit (or final salary) scheme. (Some private sector organisations offer them too.)

These are different from most workplace pensions and work according to a specific set of rules.

They also contain valuable benefits that you need to know about. If you've got an NHS pension then it might be worth seeking NHS Pension Advice from a professional financial adviser to help you make the most of it.

What if you’re a public sector worker with a defined benefit pension scheme?

Unlike most pension schemes, a final salary or defined benefit (DB) pension doesn’t depend on a saved pot of money.

Instead, it will pay you an income from the start of your retirement until you die, and often a tax-free lump sum too.

How much you receive will depend on:

• Your pensionable service (how long you’ve been a member of the scheme).
• Your pensionable earnings (either your salary at retirement or average salary over the period of your membership).
• The scheme’s accrual rate (the proportion of your salary you receive as pension for each year of service).

A typical accrual rate might be 1/80, meaning if you spend 20 years in the scheme, your DB pension would pay you 20/80 (i.e., a quarter) of your final salary. So, in this scenario, if you retired on a salary of £40,000 then you’d receive £10,000 a year for the rest of your life.

Most DB schemes will also give you the option of taking a tax-free lump sum at the point of retirement, as well as your guaranteed income for life.

In some schemes, taking a lump sum may reduce your annual income, but many public sector pension schemes pay an automatic lump sum in addition to your annual income.

What are pension freedoms?

Pension freedoms refers to the UK policy introduced in 2015 that allows individuals over 55 to access and manage their pension savings more flexibly. It offers options such as lump sums, drawdown plans, or annuities without being required to buy a fixed-income product.

Pension freedoms apply only to defined contribution (DC) schemes, giving people access to their pot of money from the age of 55. With DB schemes, this does not happen, as the schemes are designed to pay out over a period of time.

Benefits are generally paid from a date set by the scheme, often called ‘normal pension age’ or ‘normal retirement age’. Usually, this will be later than 55, though some schemes may offer early retirement with a reduced pension.

The early retirement age for public sector schemes is generally not before 55 and is expected to rise to 57 from 2028.

Can I transfer out of a DB pension scheme?

It depends on the kind of DB pension you have.

Some schemes (such as the Local Government Pension Scheme or private-sector schemes) are known as funded schemes, because they are supported by a central fund.

If you want to, you can transfer out of these DB schemes. Your pension is then moved into a DC scheme, the size of which would be determined by your pension’s transfer value.

This value may be significantly less than you would have received over retirement if you had remained in the DB scheme. The advantage is that you can access it in various ways, even all at once.

Anyone considering transferring out of a DB scheme with a transfer value of over £30,000 is required by law to seek financial advice from a qualified adviser.

So what about teachers, firefighters, police etc?

Many public sector pensions are ‘unfunded’ schemes, s there is no central fund, and they are paid for only by the taxpayer.

The pensions of teachers, firefighters, NHS workers, the police and the armed forces all fall into this category. This means it’s not possible to transfer from this kind of pension into a DC scheme.

however, this shouldn’t be seen as a negative. Most public sector pensions still outstrip the vast majority of DC pensions.

You may not have the same flexibility, but you do have the reassurance of a generous guaranteed income for life.

Get expert financial advice

Public sector pensions stand out for their stability and the reassurance of a guaranteed income throughout retirement. Unlike most DC schemes, these pensions are typically unfunded and provide a secure, predictable source of income based on your years of service and salary.

While the transfer options to DC schemes are limited, the benefits of staying within a public sector scheme can outweigh the flexibility offered by other types of pensions.

By understanding the features and advantages of your public sector pension, you can better plan for a financially secure retirement.

Let Unbiased match you with a financial adviser for expert financial advice on maximising your public sector pension benefits and exploring your options for retirement planning.

If you found this article helpful, you might also find our articles on civil service pensions and what to do if your employer hasn't paid your pension contributions informative, too.