What Is a Final Salary Pension?

I’ve heard about final salary pensions and they seem to be the best pensions on the market. Could you explain what this type of pension is for me please? And how do I go about getting a final salary pension?

Question asked by Ms A Gibbs
04/06/2021

Final Salary Pensions Explained

It’s fairly simple to explain final salary pensions: They essentially do just what it says on the tin. They’ll pay you a pension based on your final salary at retirement.

The bad news is that final salary pensions are workplace pensions set up by your employer; you won’t be able to get one of these by yourself. If your employer doesn’t offer a final salary pension, then you won’t be able to get one anywhere else.

At retirement, the fund then promises to pay the employee a guaranteed income for the rest of their life, which is almost always index-linked to keep pace with inflation.

Final salary pensions are sometimes known as defined benefit pensions, although in reality they’re just a type of defined benefit pension, which fall into two broad categories:

  • final salary pension is a pension where your post-retirement benefit based on your salary at retirement
  • career average pension is a pension where the post-retirement benefit is based on the average of your salary across your career with that employer.

How are Defined Benefit Pensions Calculated?

The income you’ll get from a defined benefit pension is based on three factors:

  • Number of years you’ve been with that employer and contributing to the DB scheme
  • Your pensionable earnings (for final salary schemes, this is your salary at retirement; for career average schemes, this is your mean salary across your career)
  • Your pension scheme’s accrual rate (the proportion of your earnings you’ll receive for each year spent in the scheme, usually represented as a fraction, e.g. 1/80th).

The common calculations for working out how much your final salary pension is worth are:

Defined Benefit Scheme Calculation

Number of years in scheme

30 years

Pensionable Earnings

£50,000 final salary

Scheme accrual rate

1/80th

30 years * £50,000 * 1/80th
An annual income of £18,750

Are Final Salary Pensions Disappearing?

Final salary schemes or career average pension plans used to be far more common, but today they’re only really provided by the largest employers or the public sector.

This is because of the expense of maintaining DB pension schemes at a time when investment performance has not always kept pace with the forces of inflation and increasing longevity.

As a result, a number of defined benefit pension schemes are now closed to new members, with employers who previously offered such plans now offering defined contribution plans instead.

Can I Leave My Final Salary Scheme?

You don’t have to stay in your pension scheme. You do have the option to transfer out of your final salary scheme. Given final salary pensions are an expensive long-term promise, many pension funds are offering attractive cash equivalent transfer values to encourage members to leave the scheme in exchange for a pot of cash.

IMPORTANT NOTICE  🧐
Note that a final salary pension transfer is not right for most people and you will be giving up considerable benefits by undertaking a transfer.

To discover more on what today’s high CETVs mean for your final salary pension, click here. Alternatively, if you’re interested in working out how much you might receive if you left your final salary pension scheme, our Final Salary Pension Transfer Calculator will give you a relatively accurate calculation of what it could be worth.

Our Services & Tools

See Your Financial Future
Find > Organize > Simplify
We exist to improve your financial wellbeing

We use clever technology to bring your financial future to life

  • Find, organise and simplify your Pensions, ISAs and other investments.
  • Plan your financial future and put a strategy in place to achieve this.
  • Regularly review how you are doing to make sure you stay on track.

Frequently Asked Questions

Contact Us

Head Office & Pensions and Investments
Senator House
85 Queen Victoria Street
London
EC4V 4AB
Personal Insurance & Accounts Payable
Telecom House
125-135 Preston Road
Brighton
BN1 6AF
Drewberry London Office MapDrewberry Brighton Office Map

If you are unhappy with our service, we have a complaints procedure, details of which are available upon request. If you are unhappy with how your complaint has been dealt with, you may be able to refer your complaint to the Financial Ombudsman Service (FOS). The FOS website is www.financial-ombudsman.org.uk.

Drewberry Ltd is registered in England and Wales. Companies House No. 06675912

Drewberry Ltd registered office: Telecom House, Preston Road, Brighton, England, BN1 6AF. Telephone 0208 432 7333

Drewberry Ltd (Financial Conduct Authority No. 505473) is an Appointed Representative of Quilter Wealth Limited and Quilter Mortgage Planning

Limited, which are authorised and regulated by the Financial Conduct Authority.