What is a 'Cash Balance' Pension Scheme?

A 'cash balance' pension scheme is a form of defined benefit pension that instead of offering a guaranteed pension offers a guaranteed lump sum.  From the guaranteed lump sum the member would be able to take 25% as a tax free payment, with the balance available for drawdown and/or annuity purchase. The employer will normally promise a percentage of salary at normal retirement age with discounts applied if taken early.  Importantly these schemes tend to be calculated on career average earnings, which in general produces a lower benefit than a traditional final salary scheme.  Also with no guaranteed pension, members incomes at retirement will be determined by market conditions at that time.  As employers look to reduce their pension liabilities, it is likely that we will see more 'cash balance' schemes being offered.