Final Salary Schemes
|
Final Salary schemes are by far and away the most common form of
defined benefit scheme in the UK. Unfortunately many schemes are in the process of
closing to new entrants as a result of the increasing cost (as a
result of lower future expected returns on the pension fund and
increasing longevity) of
providing such schemes.
These schemes provide pensions calculated as some fraction
of your salary at the point you leave the scheme. This is an
important difference to career average schemes which you will read
about later on. The fraction is calculated by considering the number
of years you have been a member of the scheme. In general terms
pension are calculated using a formula something like this
|
|
|
Years in
scheme
|
Pension
|
=
|
Salary
*
|
|
|
|
|
Accrual rate
|
Salary - This may not mean the total amount of 'salary' that you
actually get paid. The Scheme Booklet will define exactly the
'salary' to be used. In some instances it may be limited to Basic
Salary or include a deduction in respect of either the LEL or the
BSP. It may also contain other deductions or be averaged over a
period prior to leaving.
Years in scheme - This will normally be the whole period in which
you have been a member of the pension scheme. It is generally
referred to as scheme service.
Accrual rate - This is simply a number which determines the rate
at which your pension builds up. The lower the number the quicker
the pension will accumulate. A common accrual rate is 60 although
any number in excess of 30 is possible. If you have an accrual rate
of 60 and have 40 years of scheme service then you will be entitled
to a pension of 2/3rds (40/60) of your salary as a pension (subject
to Inland Revenue limits).
The important point to remember about final salary schemes is
that the pension is linked to you salary and service at the point
you leave the scheme.
|
|
|
|
|
Use our online calculator
to get an estimate of your basic state pension.
Its free and
simple to use you can even include it on your own website!
|
|
|
Tell a friend about
Essential Pensions. Send an automatic message to your friends
email account about the site.
|
|
|
If you have a pensions
related question then please let us
know.
If it's something other people
would find useful then we will post an answer in our Frequently Asked Question
(FAQ) area.
|
|
|
Read the guide to
investment in the pensions guide. It explains what you need to
think about before investing for your retirement.
|
|
