Deferred final salary pensions: what happens when you leave

A deferred pension is a pension you built up in a workplace scheme you are no longer paying into, but haven't started taking yet. With a deferred final salary pension, your benefits stay in the scheme, are increased each year under minimum legal rules, and are paid from the scheme's normal pension age, or earlier or later with an adjustment.

What "deferred" means

A defined benefit scheme usually has three kinds of member:

• Active members, who are still building up pension.
• Deferred members, who have stopped building up pension but haven't started taking it.
• Pensioner members, whose pension is being paid.

You usually become a deferred member when you leave the employer. You can also become one while you are still working there, if your employer closes the final salary scheme to further build-up. Either way, the pension you have already built up is still yours, and it is still paid under the scheme's rules.

When you become deferred, the scheme works out the pension you have earned so far, using your service and pensionable salary at the date you left. That figure is then increased each year until it is paid. Your deferred benefits normally also include a pension for your spouse or civil partner.

If you left a scheme after only a short time, you may have received a refund of your contributions or a transfer instead of a deferred pension. The scheme can tell you what happened.

"Deferred pension" can also mean putting off claiming your State Pension, which is a different thing. The government explains that in its guide to delaying your State Pension. This article is about workplace final salary pensions.

How a deferred pension grows: revaluation

Between leaving and the date your pension starts, the scheme must increase your deferred pension. This is called revaluation.

By law, most deferred final salary pensions must be increased at least in line with inflation, up to a cap. The government's explanatory memorandum to the Occupational Pensions (Revaluation) Order 2025 sets out the current minimums:

• pension built up before 6 April 2009: increased in line with inflation, capped at 5% a year
• pension built up from 6 April 2009: increased in line with inflation, capped at 2.5% a year

Since 2010 the government has used the Consumer Prices Index (CPI) to measure inflation for these minimums. Before then it used the Retail Prices Index (RPI). The calculation is made over the whole period from when you left until your pension starts, rather than year by year. The legal basis is Schedule 3 to the Pension Schemes Act 1993.

A few things to know:

• Your scheme may be more generous. Some schemes kept the 5% cap for all service, use RPI, or apply a fixed rate. Your scheme booklet will say.
• GMP has its own rules. If you were in a contracted-out scheme between 1978 and 1997, part of your pension may be a Guaranteed Minimum Pension, which is revalued separately. Our guide to SERPS and contracting out explains where GMP comes from.
• Career average schemes work differently. In a career average (CARE) scheme, each year's slice of pension is revalued under the scheme's own rules.

Illustrative example: imagine Mark left his employer with a deferred pension of £10,000 a year, all built up after April 2009. If prices rose by 2% a year for the next ten years, below the 2.5% cap, his deferred pension would grow to roughly £12,200 a year by the time it is paid. This is a hypothetical example only. Real increases depend on inflation and your scheme's rules.

Taking your pension early or late

Every scheme has a normal pension age, often 60 or 65. That is when your full deferred pension is paid without any reduction.

Taking it early

Many schemes let deferred members take their pension early. The earliest age is usually 55, and the normal minimum pension age is rising to 57 on 6 April 2028. Some people have a protected pension age that lets them take benefits earlier. Some schemes also need the trustees' or employer's consent for early retirement.

If you take your pension early, it is normally reduced, because it will be paid for longer. The reduction is set by the scheme's early retirement factors. These vary between schemes and can change, and the reduction can be significant if you retire several years early.

Illustrative example: if a scheme reduced a pension by 4% for each year it was taken early, a deferred pension of £10,000 a year taken five years before normal pension age would be reduced to about £8,000 a year, for life. This is a hypothetical example only. Your scheme's factors will be different.

If you have to stop work because of serious ill health, some schemes pay a deferred pension early with a smaller reduction, or none. This depends on the scheme's rules and medical evidence.

Taking it late

Some schemes let you take your pension after normal pension age. Your pension is then usually increased by a late retirement factor, because it will be paid for a shorter time. Not all schemes offer this, so check your scheme's rules.

Tracing a lost deferred pension

1. Gather what you know. Note the employer's name, roughly when you worked there and the scheme's name, if you know it.
2. Use the Pension Tracing Service. The government's Pension Tracing Service can give you the current contact details of a workplace or personal pension scheme. It can't tell you whether you have a pension or what it is worth.
3. Contact the scheme. Give them your National Insurance number, date of birth, the dates you worked there and any old addresses. They can confirm your deferred benefits and send you a statement.
4. If the scheme has moved into the Pension Protection Fund, contact the PPF instead.

Once you have found it, keep the scheme up to date with your address.

Be wary of companies that offer to trace pensions for a fee, or that contact you out of the blue about an old pension. Check the FCA's ScamSmart site if you are unsure.

Your options at retirement

When you are ready to take your deferred pension, the main options are usually:

• Take the full pension from normal pension age, or earlier or later with an adjustment.
• Take tax-free cash in exchange for a lower pension. Our guide to final salary pensions explains how commutation works.
• Take a small pension as a lump sum, if it is small enough under HMRC rules. See cashing in a small defined benefit pension.
• Transfer it before you start taking it, after taking regulated advice where required (see below).

If you also have older personal pensions, retirement annuity contracts or section 32 policies, check whether any of them include a guaranteed annuity rate. These guarantees can be valuable and are easy to lose by accident. Arthur Browns can advise directly on pensions with guaranteed annuity rates, subject to suitability; advice is chargeable.

For free, impartial guidance on your options, you can contact MoneyHelper. If you have defined contribution pensions too and are aged 50 or over, Pension Wise offers a free guidance appointment.

Transferring a deferred final salary pension

Your right to a transfer value

Under section 93 of the Pension Schemes Act 1993, you generally have a legal right to ask for a cash equivalent transfer value (CETV) if you haven't started taking your pension and you stopped building it up at least a year before the scheme's normal pension age. Some schemes allow transfers in other situations too.

Our guide to what a pension transfer value is explains CETVs in detail. In brief:

• a CETV is guaranteed for three months from its guarantee date
• you are usually entitled to one free statement every 12 months, and the FCA notes you may have to pay for another within that time
• asking for a transfer value doesn't commit you to anything

The whole process can take several months. See how long a pension transfer takes.

The rules on advice

• Advice is legally required over £30,000. The FCA says that if your DB pension is worth more than £30,000, you must, by law, get advice from a regulated financial adviser. That adviser must work for a firm with the pension transfer permission.
• The FCA's starting assumption. The FCA's rules say an adviser should start by assuming a transfer will not be suitable. For most people, keeping the guaranteed pension is the better option. See the FCA's guide to defined benefit pension transfers.
• A transfer cannot usually be reversed.

What you would give up

A transfer swaps a guaranteed, inflation-linked income for life for an invested pot that can fall in value. You would also give up any spouse's or dependants' pension, the protection of revaluation, and any protection from the Pension Protection Fund if your old employer fails.

Who can't transfer

Members of the unfunded public-sector schemes, such as the NHS, Teachers', Civil Service, Police, Firefighters' and Armed Forces schemes, have not been able to transfer to a defined contribution pension since April 2015. The Local Government Pension Scheme is funded, so its members can. See our guides to public-sector pensions and the LGPS.

Questions to ask your scheme

• what is my deferred pension today, and what will it be at normal pension age?
• what early retirement factors apply, and do I need consent?
• what would my spouse or civil partner receive if I died?
• what is my transfer value, and when is it guaranteed until?

Frequently asked questions

What is a deferred pension?

It is a pension you have built up in a workplace scheme that you are no longer paying into, but haven't started taking. You usually become a deferred member when you leave the employer, or when the scheme closes to further build-up.

Does a deferred final salary pension go up each year?

Yes. By law, most must be increased at least in line with inflation until paid, capped at 5% a year for pension built up before 6 April 2009 and 2.5% a year after that. Many schemes are more generous.

Can I take my deferred pension early?

Many schemes allow it, usually from age 55, rising to 57 from 6 April 2028 unless you have a protected pension age. Your pension will normally be reduced for early payment. Ask your scheme for a quote.

What happens to my deferred pension if I die before I take it?

Most schemes pay a pension to your spouse or civil partner, and some pay a lump sum or pensions for other dependants. Check your scheme booklet and keep your expression of wish form up to date.

What happens to my deferred pension if my old employer goes bust?

If your employer becomes insolvent and the scheme can't pay members' pensions, the Pension Protection Fund may pay compensation. For members below the scheme's normal pension age it is usually lower than the full pension. Read more about the PPF.

Can I transfer a deferred final salary pension?

Often, yes, if you haven't started taking it and your scheme isn't an unfunded public-sector scheme. If it is worth more than £30,000, you must take regulated advice first, and the FCA's starting assumption is that a transfer is unlikely to be suitable for most people.

If you have a deferred final salary pension with a transfer value of £50,000 or more and you'd like to understand how transfers and the advice process work, you can book a free, no-advice chat. It is general information, not advice. If your pension is worth less than £50,000, MoneyHelper offers free, impartial guidance.