Company Pensions: Final Salary schemes
The 'Final Salary' scheme
With a final salary scheme, the pension you receive at retirement is related to your final salary before retirement and the number of years service you have with that particular employer. A final salary in the years just before retirement is often the average of the employee's last three years salary before retirement. The resultant salary amount calculated for pension purposes is then multiplied by the number of years of membership in the final salary scheme. This figure is then divided by the schemes accrual rate to work out the retirement benefits before any tax free cash. This method of calculating retirement benefits can secure a very good pension for the rest of an ex-employees life.
Upon retirement pension benefits can be secured with the provision for a spouse and/or dependants pension. Inflation proofing and escalation of income are typical features of a Final Salary Scheme. The payment of a Tax free lump sum is also an option.
Final salary pension schemes are increasingly basing the pension calculation on average lifetime earnings