Final Salary Pension Schemes

A Final Salary (or Defined Benefit Scheme as they're sometimes known) offers you a pension that is built up or accrued in a specific way.

There is a common principle to all final salary schemes. Effectively, each member of the scheme accrues a percentage of their final salary for each year that they are an active member.

A Basic Example:

Date Joined Pension Scheme:	01/06/1985
Date Left Pension Scheme:	01/06/2000
Total Scheme Membership:	15 Years
Final Salary (earned in 2000):	£20,000
Accrual Rate (sometimes shown as a %):	1/60th

To work out the basic scale pension divide the pensionable service (15 years) by the accrual rate (60ths) and then multiply it by the final salary (£20,000).

It's shown like this = 15/60 X £20,000 = £5,000. This amount increases in the period from leaving to retirement.

Essentially, the pension scheme is promising that they will pay a retirement income, for the rest of your life, based upon on a percentage of your final salary. This style of pension scheme dictates the longer you work and the more you earn, the better the pension will be.

In past years a Final Salary pension scheme was seen as a major benefit to an employees remuneration however these days people tend to spend a lot less time in one job so a person may end up with several "preserved" or "frozen" final salary pensions.

At present, it is believed there are over 8 million members of Final Salary Pension Schemes. It is expected for this number to fall in due course as employers find it difficult to justify the huge financial burden these types of schemes cause.