What is a final salary scheme?
The income you receive at retirement is based on the number of years you have been employed within the scheme and how much you earn when you decide to retire or leave the scheme.
The actual amount of income you receive will be different from scheme to scheme and member to member. Each scheme has its own rules and level of benefits offered.
The actual benefits are based on 4 elements.
1. The amount of time you have been employed and credited with benefits been an active member of the scheme.
2. The accrual rate. This is the formula used which takes into account your salary and length of service.
3. Your pensionable salary.
4. The point at which you take your pension. This is based on factors such as early retirement, ill health early retirement, normal retirement date, death etc
Unlike defined contribution schemes, final salary schemes don’t have an actual personal fund value. Instead, the value of your pension is determined by the benefits you have built up, and more importantly how much it would cost to buy those benefits if you moved away from the scheme. The Board of Trustees manage the assets, to ensure there are sufficient funds to continually pay member benefits.
For those who wish to transfer their pension, and give up these safeguarded benefit to have more flexibility, a Cash Equivalent Transfer Value (CETV) can be requested.
This is the cash value placed on your pension benefits which can then be used to transfer to a defined contribution pension or if this is done at retirement, any of the available income options such as an annuity or flexi-access drawdown.