Defined benefit: Final Salary Schemes

The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.

How final salary schemes work

Many final salary schemes have either been closed to new members or to all members over recent years, although they are still offered by some, mainly larger, employers.
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A final salary pension scheme is typically run, on behalf of the employer by the Board of Trustees, who are responsible for all aspects of the scheme. This includes paying benefits to retired members. Daily management of the scheme is typically done by the Scheme Administrator, who reports to the Board of Trustees.
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A final salary scheme normally offers you an income in retirement based on a proportion of your ‘final salary’, although other factors can be taken into account. It’s important to note that ‘final salary’ doesn’t necessarily mean the actual salary that you're earning at the time you retire and draw your benefits from the scheme.

​Example: What is meant by ‘salary’ or ‘earnings’?

The pension scheme’s rules will define what is meant by your ‘salary’ or ‘earnings’ and how the calculation of ‘final salary’ or ‘final earnings’ is made.

For example, some schemes don't count additional earnings, such as overtime, commission, bonuses or the value of benefits in kind (other benefits that are not paid as cash to the member).

The scheme may also only count a proportion of your wages or salary. The amount of earnings that are used to calculate retirement benefits is often called ‘pensionable earnings’.
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If you’re a member of a final salary scheme, your pensionable earnings are recalculated each year, to take account of changes in pay. When you decide to retire and draw pension benefits from the scheme, your ‘final pensionable earnings’ are calculated, according to the scheme rules. These may be pensionable earnings in the final year before retirement, or may be an average of pensionable earnings over a specified prior to retirement.

As a member, you will build up a fraction (the accrual rate) of your final pensionable earnings for each year of membership of the scheme. Typically, this fraction may be 1/60th or 1/80th of final pensionable earnings for each year of scheme membership, although other fractions may be used. You can check this in your scheme’s rules.

Pensions that are being paid to you after retirement may be increased each year to offset the effects of inflation. The amount of the annual increase may be specified in the scheme rules, or may be decided by the Board of Trustees.

You should normally have been given a booklet when you joined the scheme. This booklet would give you details of the benefits. If you no longer have the booklet, contact the Scheme Administrator and ask for details.

Transferring out of a final salary pension is unlikely to be in the best interests of most people.

​If you're a member of a defined benefits pension scheme and the value of your benefits is more than £30,000 you will need to take advice from a financial advisor.
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If you're a member of a defined benefits pension scheme, and the value of your benefits is more than £30,000, you will need to take advice from a financial adviser ​
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​The value of the investment can go down as well as up and you may not get back as much as you put in.