By Team SalaryCalculate · 1/7/2026

Defined Benefit vs Defined Contribution: Redundancy Pension Choices

When facing redundancy, understanding your pension choices is critical to making the most of your redundancy package. Two pension types to consider are defined benefit and defined contribution.

Defined Benefit Pensions

Defined benefit pensions, also known as 'final salary' or 'career average' pensions, promise a specific income on retirement. The amount is calculated based on your salary and how long you've been a member of the scheme.

For example, if your pension scheme promises to pay 1/60th of your final salary for each year of scheme membership, and you've been a member for 20 years, you'd get a third of your final salary as your pension income.

In the case of redundancy, you have several options for your defined benefit pension:

**Deferred Pension:** You can leave your pension in the scheme until your retirement age. This is called a 'deferred pension'.

**Early Retirement:** If you're near retirement age, you may be able to take your pension early. However, your income is likely to be lower because it's being paid out for longer.

**Pension Transfer:** You may be able to transfer your pension to a new employer's scheme or a personal pension. But be aware, this is a high-risk option and isn't suitable for everyone.

Defined Contribution Pensions

Defined contribution pensions, also known as 'money purchase' pensions, involve you (and usually your employer) contributing to a pension pot. The money in the pot is invested, and the income you get when you retire depends on how much was contributed and how well the investments have done.

With a redundancy package, you may receive a 'lump sum' which you could potentially invest into a defined contribution pension. This could be beneficial if the investment performs well, but there's also a risk it could do poorly.

If you're made redundant, you have several options for your defined contribution pension:

**Leave it Invested:** You can leave your pension pot invested until you're ready to access it.

**Take 25% Tax-Free:** You can usually take 25% of your pension pot as a tax-free lump sum once you reach 55.

**Buy Annuity or Drawdown:** You can use the rest to buy a guaranteed income for life (annuity) or go into drawdown, where your pension remains invested and you take income as you need it.

Redundancy Pension Choices

Choosing what to do with your pension in the event of redundancy can be complex, and it's important to think through your options carefully. Consider factors such as your age, financial situation, health, and future work plans.

If you're unsure, use our [redundancy pension calculator](/tools/uk/england/redundancy-pension-calculator) to help assess your situation, or speak to a financial adviser.

Redundancy Payments and Your Pension

Statutory redundancy pay is based on age, weekly pay and number of years in the job. As of April 2025, the maximum weekly pay cap is £719, and the maximum total payment is £21,570 (£719 × 20 years × 1.5). These limits are reviewed annually in April.

Here's how the calculations work:

FAQs

**Can I take my pension early if I'm made redundant?**

Yes, if you're over 55, you can usually access your pension. But, it's important to consider any potential tax implications and the impact on your future retirement income.

**Can I put my redundancy payment into my pension?**

Yes, you can usually do this. However, there are limits on how much you can contribute to your pension each year without attracting a tax charge.

**What happens to my pension if I'm made redundant?**

This depends on the type of pension you have. It might stay in your current scheme until you retire, or you could transfer it to a new employer's scheme or a personal pension.

**Can I use my redundancy payment to pay off debts?**

Yes, but consider your long-term financial security too. Our [redundancy budget planner](/tools/uk/england/redundancy-budget-planner) can help you explore your options.

Remember, redundancy can be a difficult time, but understanding your redundancy and pension options can help ensure you make the best decisions for your future. For more information, see our article on [redundancy-pension-options](/blog/redundancy-pension-options).