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Final salary schemes
21 April 2006
Final Salary Schemes provide a pension based on the member’s salary when they retire or leave the scheme and the number of years membership.
For every year of service, the member builds up a pension entitlement calculated by reference to their earnings when they leave the scheme, hence the term ‘final salary’.
The rate at which the pension builds up is called the accrual rate, and is usually expressed as a fraction. The most common accrual rate is 1/60th, so that after 40 years service the pension entitlement is 40/60ths, or two thirds of final salary. After 30 years service a pension of half salary is been built up. After 15 years the pension is one quarter of salary. After 10 years, one sixth of salary.
Lower accrual rates mean that it will take longer to build up the same value of pension. In a 1/80th scheme it takes 40 years to build up a pension of half earnings. In a 1/70th scheme it takes 35 years to build up a pension of half earnings.
Schemes have various definitions of pensionable earnings: some use all earnings, others just basic pay. Many schemes take account of the state benefits members can expect to receive when identifying pensionable earnings, a process known as integration or clawback.
Schemes also provide a bundle of additional benefits according to their own rules. These usually include: a tax-free cash sum at retirement, early retirement, ill-health pensions , a pension for a spouse, child or other dependant on death-in-service or in retirement.
Final Salary Schemes are sometimes called "defined benefit schemes" as the benefits are defined in the scheme rules
Final Salary Schemes are usually the best option for Usdaw members if one is available.
Contact Details
Pensions section
Ph: 0161 249 2440
Fax: 0161 249 2475
Email: pensions@usdaw.org.uk
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