Final Salary

Final salary schemes are also known as defined benefit schemes. With this type scheme, your pension will be a set percentage of your final salary depending on the length of service with the company. The pension received will be based on a fraction of the money taken into account by the scheme at retirement. The size of the fraction depends upon your length of service.

Years of service

The most commonly used fractions are one-sixtieth or one-eightieth for each year of service. For example, anybody in a final salary pension scheme based on sixtieths between the ages of 25 and 65would be entitled to a pension of two-thirds of their final salary (this is the maximum permissible). Fewer years of service means a smaller pension, so retiring early generally means a reduced pension. Private sector pension schemes may offer the option of exchanging part of your retirement fund for a tax-free lump sum.

Final salary schemes

Final salary schemes sometimes provide members with other features as well as an income at retirement; such as the option to exchange a percentage of the pension for a tax-free cash sum; life assurance cover; survivor’s and children’s pensions after the member’s death; ill-health early retirement; the option to pay additional voluntary contributions (AVCs) to buy additional benefits.

As fewer and fewer people today remain with the same company throughout their working lives, if you leave the company, the benefits in the scheme can be left as a deferred pension (provided you have been in the scheme for two years or more) or the pension could be transferred into another scheme. It is always a good idea to take financial advice before considering moving a pension.