Company final salary pensions

If you are currently a member of a final salary pension, or have been in the past, then you can jump for joy! They are often called ‘gold plated’ pensions with good reason as the benefits are seldom bettered. Effectively, the scheme works by guaranteeing to pay you a pension when you retire. The amount you receive depends on your length of service and the fixed growth factor applied to your salary at retirement.
Company final salary pensions

Is a final salary pension different to other pensions?

Yes, and it’s the word ‘guarantee’ that’s really worth having. There’s a promise to pay you a guaranteed amount of income at your retirement age, and that’s pretty much not the case with the overwhelming majority of other pensions.

You won’t have your own individual pension pot as you do with money purchase pensions which build up your savings based on what’s paid in and how well they grow. As a final salary scheme member, each year you and the other members build up benefits and in your annual statement you get to see how much income you have built up for that year and over previous years.

Final salary example

Schemes use an accrual rate (jargon alert) which is essentially a fraction given to you for every year you are a scheme member. So, for a scheme with 1/60 rate, each year you work you earn 1/60 of pension. If you work for the employer for 30 years then that’s 30/60.

This fraction is multiplied by your salary to decide your pension income e.g.

30/60 X £20,000 salary = £10,000 per year annual pension.

The final salary scheme is also a bit different if you leave your employer. Unlike a personal pension where you take your own account and can continue to pay into it, or even ask a new employer to, your final salary benefit stays with your old employer. Each year the scheme will apply an increase to the pension you have built up to provide some protection against inflation as you might not receive the pension for decades.

Final salary schemes are also overseen by scheme trustees who employ advisers to help with the administration, investments and all the legislative and regulatory requirements, and there’s a lot of those!

Free pension information guide

Free pension information guide

Simply fill in our form and we will post out a pension information guide to you today!

Final salary pension principles

  • You are generally required to pay into the scheme, and the government pays in too by giving you tax relief. Your employer must pay in to the scheme.
  • There’s a single pension fund for you as a past or present member. Your employer has advisers called actuaries (basically very clever financial accountants) who advise them on the money they need to pay in to ensure you receive your guaranteed pension.
  • Although you can take out tax-free cash, you will also receive a pension income which increases each year to give you some protection against inflation.
  • There’s no investment risk for you as the scheme investments fund your pension and your employer must keep paying in to ensure there’s enough money to pay your income.


What happens if the scheme closes?

There can be a number of reasons why an employer might close a final salary scheme but in the majority of cases it’s down to cost. We’re all living longer and your employer has to provide a guaranteed income for all of your life and potentially that of your spouse/partner too. If economic times worsen then the funding also goes up and overall it’s that uncertainty that organisations find difficult to build into their plans.

If your employer’s business fails and the organisation stops trading then obviously the scheme will have to close. The good news is that there’s a lifeboat available. The Pension Protection Fund take over the pension from your employer and ensure you receive the majority of your future guaranteed pension.

Your no obligation pension check with Portafina

We will help you make the right decision about your pension, with advice that’s refreshingly frank.