How UK public sector pensions actually work

If you’ve just started a public sector job, or you’ve been in one for years but the pension materials always made your eyes glaze over, this is the article to read first.

It’s a primer. It explains how UK public sector pensions actually work, what’s different about them compared to private sector pensions, and where to go next depending on your scheme.

Start with the short answer

Most UK public sector workers belong to a defined benefit pension scheme. That means you contribute a percentage of your salary each year, and at retirement you get a guaranteed income for life, calculated by formula. You don’t manage an investment pot. You don’t choose funds. The risk that the scheme “underperforms” doesn’t fall on you. It falls on your employer and, ultimately, on the government.

That’s the headline. The rest is detail.

DB versus DC: why this matters

Most private sector pensions today are defined contribution. You and your employer pay money into a pot. The pot is invested. At retirement, you have whatever the pot is worth, and it’s your job to make it last.

DB is fundamentally different. You don’t have a pot. You have a promise: a promise that at retirement, you’ll receive £X per year, indexed against inflation, for the rest of your life, with provisions for your spouse if you die. The promise is backed by your employer (your scheme), and in the case of unfunded public sector schemes, ultimately by the government’s tax-raising power.

Why this matters: DB is generally significantly more valuable than DC of the same nominal contribution rate. The risk of bad investment returns or living longer than expected falls on the scheme, not you. It’s also much less portable. You can’t simply transfer it out without losing significant value, and in some cases you can’t transfer it out at all.

If you’ve come from the private sector to a public sector job, this is genuinely good news. The pension is one of the largest, least visible parts of your total compensation.

The seven main schemes

The major UK public sector pension schemes are:

• NHS Pension Scheme, for healthcare workers in the NHS in England and Wales (Scotland and Northern Ireland have separate but very similar schemes).
• Teachers’ Pension Scheme, for teachers in state schools, FE colleges, and many independent schools that participate.
• Civil Service Pension Scheme (alpha), for civil servants.
• Armed Forces Pension Scheme (AFPS 15), for members of the regular and reserve armed forces.
• Police Pension Scheme 2015, for police officers.
• Firefighters’ Pension Scheme 2015, for firefighters.
• Local Government Pension Scheme (LGPS), for local council employees, school support staff, and many others.

Each has its own administration, contribution rates, accrual rules, and quirks. We have separate plain-English guides for each, linked above.

Funded versus unfunded

The LGPS is funded. There’s an actual investment pot, managed across regional pension funds in England and Wales (plus separate Scottish and Northern Ireland funds), holding equities, bonds, property, and other assets. Each fund pays its members’ benefits out of those assets and contributions.

Most other public sector schemes (NHS, Teachers’, Civil Service, Armed Forces, Police, Firefighters’) are unfunded, also called “pay-as-you-go”. There’s no pot. Today’s contributions pay today’s pensioners. Tomorrow’s taxpayers pay tomorrow’s pensioners.

For members, this distinction usually doesn’t change much in practical terms. You still get your guaranteed pension. But it does affect transfers, scheme governance, and (in extreme circumstances) what happens if a fund struggles. LGPS funds have actual investment performance to worry about. UnCARE versus final salary

Two different ways your pension gets calculated.

Final salary schemes calculate your pension based on your salary at, or near, retirement. So if you earn £50,000 in your last year, and you’ve accrued 20 years of service at, say, 1/60 per year, your pension is 20/60 × £50,000 = £16,667/year.

Career Average Revalued Earnings (CARE) calculates your pension based on every year of pay separately. Each year, you earn a fraction of that year’s pay as pension entitlement. Each year’s earned amount is then revalued (uprated each year by an inflation-linked rate) until you retire.

Most public sector schemes shifted from final salary to CARE in 2015 (the “reformed schemes”). Older members may still have legacy benefits in a final salary scheme. Newer members are entirely on CARE.

CARE is generally less generous for people whose careers end with significant promotions, because their final salary is much higher than their average. It’s more generous for people whose pay grows roughly in line with revaluation, because revaluation captures the increases as they happen.

How accrual actually adds up

In a CARE scheme like the NHS 2015 or Civil Service alpha, here’s the mechanism:

1. Each year, you earn a fraction of your pensionable pay as pension entitlement. Common rates: 1/54 for NHS, 2.32% (≈1/43) for Civil Service alpha, 1/57 for the Teachers’ Pension Scheme career average, 1/49 for the LGPS main section. The uniformed services have their own rates.
2. That earned amount goes into a notional “pot”. It’s not an investment account. It’s a record of your accrued pension entitlement.
3. Each year, your existing pot is revalued upwards. Different schemes use different rates: typically CPI plus a margin while you’re an active member, CPI alone for deferred members.
4. At retirement, you add up everything in your pot, apply any actuarial adjustments for early or late retirement, and that’s your annual pension.

Worked example. You join the LGPS at 35 earning £30,000. You earn 1/49 × £30,000 = £612 of pension that year. The next year you get a 3% pay rise to £30,900 and earn 1/49 × £30,900 = £631 of pension. Both years’ pension entitlements are then revalued every subsequent year. Over 30 years, with revaluation, you build up a meaningful annual pension.

Contributions

You pay a percentage of your pensionable pay. Most schemes use a tiered system: lower earners pay a lower percentage, higher earners pay a higher percentage. Tiers and rates are reviewed periodically and change occasionally.

Your contributions get tax relief at your marginal rate automatically through salary deduction. They come out of your pay before tax is calculated, so the actual cost to you is less than the headline rate.

Your employer contributes substantially more, typically in the 20-30% range of pensionable pay, directly into the scheme. It’s not money you can access or transfer. It’s the cost of providing your guaranteed pension promise.

Tax: the basics, and the trap

For most members, tax just works automatically. You don’t need to think about it.

For high earners, two potential issues.

The Annual Allowance (£60,000 for 2026/27) caps how much your pension can grow tax-efficiently each year. In a DB scheme, “growth” is measured as roughly 16 times the increase in your annual pension, plus any new lump sum. Big pay rises, promotions, or unusual pension events can push you over.

The Annual Allowance also tapers down for very high earners: where threshold income is over £200,000 AND adjusted income is over £260,000, the AA reduces by £1 for every £2 of adjusted income above £260,000, down to a floor of £10,000. This is why senior doctors, judges, and senior officers sometimes face large unexpected tax bills.

If you’re a high earner, this is the most important pensions topic for you to understand. We’ve covered it scheme-by-scheme in our scheme guides.

McCloud

If you were a member of any of the major public sector schemes between 1 April 2015 and 31 March 2022, the McCloud Remedy applies to you. We’ve written a separate guide: McCloud Remedy: what’s actually happening to your pension.

The big questions

These are the questions members ask most often. We don’t give financial advice, but here’s the conceptual frame for each.

Should I opt out?

Almost never. Opting out gives up the employer contribution, which is by far the largest component of your total compensation. There are very specific scenarios where opting out makes sense, typically high earners hitting the Annual Allowance taper with no other employment options. For the vast majority of members, opting out costs you tens or hundreds of thousands of pounds over a career.

Should I pay AVCs?

Additional Voluntary Contributions are an optional top-up. They’re attractive if you’ve maxed out your scheme’s regular contributions and you’re not at the AA limit. They generally go into a DC pot rather than buying additional DB pension. Worth considering, but not automatic.

Should I transfer out?

Almost never, unless your circumstances are unusual: a terminal diagnosis, a very specific tax position, or sometimes a partner’s situation. Transferring a public sector DB pension into a DC pot is rarely a good trade. The Pensions Regulator has flagged this area as high risk for poor advice. If you’re considering it, the FCA requires regulated advice for transfers above £30,000.

Common questions

Where to learn more

If you’re in one of the seven main schemes, our scheme-specific guides cover the detail:

• NHS, see also our detailed NHS Pension Scheme guide
• Teachers’, see also our detailed Teachers’ Pension Scheme guide
• Civil Service, see also our detailed Civil Service Pension Scheme guide
• LGPS, see also our detailed LGPS guide
• Armed Forces, see also our detailed Armed Forces Pension Scheme guide
• Police
• Firefighters’

For free, impartial guidance: MoneyHelper (Money and Pensions Service).

For specifics about your own pension: log into your scheme’s member portal and check your latest annual benefit statement.