Final Salary Pension

What is a final salary pension?

A final salary pension is a particular type of occupational pension. You will have a final salary scheme if your employer has set this up for your benefit.

The way a final salary pension scheme works is that your employer will guarantee your pension based on the number of years that you work for the company, and the final salary that you finish on before you leave the company.

For each year that you work for the company, you will gain a proportion of your final salary as a pension, up to a maximum allowable figure of two thirds of your final remuneration (this is a technical term, but final salary schemes usually refer to basic salary).

For example, a common multiple for a final salary pension is 1/60 for each year of service. If you work for your company for 40 years, you will accrue 40/60 x your final salary as a pension. This would then equate to two thirds of your final salary as a pension.

Benefits of a final salary pension

The main benefit of a final salary pension is the fact that your employer provides a guarantee that your pension will be a certain amount, and that your pension will increase at least in line with minimum standards. You may be required to contribute, but you will invariably get a good deal with a final salary pension.

However, this is the reason that final salary pension schemes are becoming less popular with employers. Because they must guarantee the pensions of their employees, the final salary pension funds must meet legal solvency criteria. Because shares have not performed well in recent years, many employers have decided that this burden is too great a risk, and have decided to close their existing final salary pension schemes.

For this reason, if your employer offers a final salary pension, it should be in your interests to join. However, you should always seek financial advice before taking such a decision.

Click here to see a leaflet on why you should review your pension plans.

Why not contact us if you have a question about a final salary pension?