Short answer: a final salary (defined benefit) pension of £10,000 a year, inflation-linked with a 50% widow's or widower's pension, would cost roughly £240,000 to buy from an insurer at 65 — about 24 times the income. Most people with one are wealthier than they think. The two decisions you actually get to make — when to start it, and whether to swap some of it for a bigger tax-free lump sum — are arithmetic, and Money Horizon now does both inside your plan. The third question, transferring out entirely, is the one the FCA reserves for regulated advice, and this tool deliberately does not touch it.
What a defined benefit pension is
Instead of a pot, the scheme promises an income: so much a year, for life, from the scheme's normal retirement age, rising by a rule — typically inflation capped at 5% a year for pension earned after 1997, capped at 2.5% for pension earned after 2005. When you die, a spouse or partner usually keeps half. There is nothing to invest, nothing that can run out, and nothing that enters your estate for inheritance tax — before or after the 2027 rule change — because there is no pot to inherit.
What it is worth
The clean way to value it: what would the same income cost to buy? At 2026 annuity rates, £1 a year of inflation-linked income from 65 costs roughly £24; level income about £15. So:
| The scheme pays | Inflation-linked value at 65 | If it never rose |
|---|---|---|
| £5,000 a year | ≈ £120,000 | ≈ £74,000 |
| £10,000 a year | ≈ £240,000 | ≈ £147,000 |
| £20,000 a year | ≈ £480,000 | ≈ £294,000 |
That is why the planner counts it as guaranteed income, like the state pension: it shrinks what your invested pots have to carry, raises the income your plan can sustain, and survives every market stress test untouched.
The caps are the catch
"Rises with inflation" almost always means capped. In the planner's high-inflation stress test a pension capped at 5% falls behind prices — and one capped at 2.5% falls badly behind. This is the honest weakness of defined benefit: it cannot run out, but a decade like the 1970s quietly shrinks what it buys. The planner applies your scheme's cap in deferment (revaluation) and in payment, so the stress tests show the real exposure rather than treating the income as perfectly safe.
Taking it early — or late
Start it before the scheme's normal retirement age and it is reduced, typically around 4% for each year early; start late and it is uplifted, around 5% a year. Taking a £10,000-at-65 pension at 60 means roughly £8,000 — but for five more years. Whether that trade works depends on the rest of your plan (bridging to the state pension, tax bands, what your pots must cover meanwhile), which is exactly what the year-by-year projection is for: change the start age and watch the whole plan move.
The lump sum question
At retirement most schemes offer commutation: give up some pension for a bigger tax-free lump, at a factor the scheme sets. A factor of 12 means £12 of lump per £1 a year surrendered — for life.
The arithmetic that decides it:
- Tax first. The pension is taxed as income; the lump is tax-free. At a 20% retirement tax rate, a factor of 12 is really 12 ÷ 0.8 = 15 after tax; at 40%, it is 20.
- Compare with what the income costs to buy. If inflation-linked income at your age costs ~24 times, an after-tax factor of 15 means the scheme is buying your pension back cheaply — you are giving up more value than you receive. Factors of 25–30 (some public sector cash options price better) can genuinely favour the lump.
- The breakeven age. Roughly, start age plus the after-tax factor: take a factor of 12 at 65 with 20% tax and living past about 80 means the pension would have paid more. UK life expectancy at 65 is around 85–87.
The planner's Final salary: lump or income calculator runs all three lines for your numbers. Health, the survivor's share (which usually continues in full even after commutation — check your scheme), and simply needing the cash are real considerations the arithmetic cannot settle.
The transfer question — deliberately not here
Transferring a defined-benefit pension into a pot (a CETV transfer) surrenders a guaranteed income for a lump you must then invest and make last. The FCA requires regulated advice for any transfer above £30,000 and considers that most people are best served by keeping the guarantee — a view forged in the British Steel scandal. Money Horizon shows what your pension is worth as income and will not produce a transfer comparison; if you are considering one, that conversation belongs with a regulated pension-transfer specialist.
Questions people ask
Is a final salary pension part of my estate for inheritance tax? No — including under the April 2027 rules. There is no pot to inherit; the income dies with you (and your survivor). Any separate lump-sum death benefit paid by the scheme may be treated differently — check the scheme's rules.
What happens to it when I die? Typically a spouse or civil partner receives 50% (sometimes two-thirds) for life, and it usually still rises by the scheme's rule. The planner models the survivor's share through both deaths for couples.
Should I take my deferred pension early? The reduction (~4% a year) is roughly actuarially fair — the scheme expects to pay the same in total. It becomes a planning question, not a value question: taking it early can bridge the years before the state pension and reduce pension withdrawals when markets are down. Change the start age in the planner and compare.
Is the lump sum always tax-free? Within the overall lump-sum allowance (£268,275 across all your pensions), yes. Statements usually quote the standard lump separately from any extra commutation offer.
Where do the figures here come from? Annuity-equivalent values use the planner's dated annuity table (typical UK rates); revaluation and indexation caps are the statutory norms — your scheme's own statement is definitive, and the planner takes what it says.