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Cash Balance Schemes
19 December 2007
These schemes have some features found in final salary schemes, and similarities to money purchase schemes. They are also known as Retirement Balance Schemes.
The benefit promised by the employer is a cash sum, which the member then uses to buy a pension annuity when they retire.
The value of the cash sum is expressed as a proportion of the member’s earnings for each year’s service.
Typically a cash balance scheme might provide 20 per cent of earnings for each year’s service.
So after 30 years a member would have a lump sum of 30 X 20 per cent of earnings = 6 years earnings. This lump sum would then be used to buy an annuity (a pension). The amount of this annuity will depend on a number of factors including life expectancy, and interest rates.
So a cash balance scheme is a hybrid between final salary and money purchase, in that the investment risk is with the employer, but the annuity rate risk is with the employee.
Contact Details
Pensions section
Ph: 0161 249 2440
Fax: 0161 249 2475
Email: pensions@usdaw.org.uk
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