What is a Final Salary Pension?

in
Final-salary or defined-benefit schemes are offered by some employers and provide largely guaranteed benefits at a pre-determined age and are not heavily reliant on investment performance.
 
The amount of pension you can expect to receive at retirement is based on:
  • your pensionable earnings;
  • the number of years you have been a member of the scheme; and
  • the proportion of those earnings you receive as a pension for each year of membership (called the accrual rate). The most common accrual rates are 1/60th or 1/80th of your pensionable earnings for each year of pensionable service.

The benefits of these schemes are that:

  • your pension benefits are linked to your salary while you are working, so they automatically increase as your pay rises;
  • your pension entitlement is not dependent on the performance of the stockmarket or other investments;
  • the pension scheme will normally increase your pension income each year in line with the Retail Prices Index (RPI) or a set percentage, whichever is the lower.

The scheme is run by trustees who look after scheme members’ interests.

If you cease working for the employer you cannot continue to accrue benefits within the scheme. Your benefits remain within the employer's scheme and become payable at normal retirement age (as defined in the scheme rules). This is known as a preserved or deferred pension. Alternatively you may wish to transfer it to your new employer or an alternative pension arrangement, but there are risks and costs associated to that. We are here to provide advice if you are thinking of transferring your pension.

Your employer is responsible for ensuring there is enough money at the time you retire to pay you the pension. However your benefits are not fully guaranteed if your employer becomes insolvent.

The government has established the Pension Protection Fund to provide protection for members of salary-related schemes. Click here for more details.

Important Information

Taking any of your pension benefits early is likely to reduce your income at retirement. Therefore, pension release is only suitable for a very limited number of people and circumstances and should not be seen as an easy option for raising cash. This is because a pension is designed to provide you with benefits when you retire. The guidance and/or advice contained in this website is subject to UK regulatory regime and is therefore restricted to consumers based in the UK. The Financial Services Authority does not regulate some forms of tax advice, secured loans, unsecured loans, debt management and Wills. Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.