Final Salary

In the UK an estimated 8.5 million people have a final salary pension scheme. 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 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 is depends upon your length of service.

Years of service

The most common 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 65 would be entitled to a pension of two-thirds of their final salary (this is the maximum permissible).

Obviously, fewer years of service means a smaller pension, so retiring early generally means a reduced pension. Private sector schemes may offer the option of exchanging part of your pension for a tax-free lump sum.

Final salary schemes

Final salary schemes sometimes provide members with other features as well as a pension at retirement; such as the option to exchange some 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; contracted-in or contracted-out of the state second pension.

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 either 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 transferring a pension.