PLANNING
Defined benefit/final
salary pensions
A defined benefit/final salary pension scheme is one that promises to pay out
an income based on how much you earn at retirement.
Unlike defined contribution pensions, the amount you
will receive at retirement is guaranteed and it will be
paid directly to you – you won't have to use your
pension pot to decide upon your next move.
If you have saved into a final salary pension scheme,
your savings, along with the contributions from your
employer and the tax relief you receive from the
government, have been invested for you over your
working years .
The income you ultimately receive from
your pension is a guaranteed, pre-agreed
amount. This is why they are called "defined
benefit" pensions.
There are two types of defined benefit pension.
Final salary schemes
Career average schemes
Other benefits of defined benefit/final salary schemes:
Death in service payments to spouses, partners or
dependants if you die before reaching pensionable age.
Full pension if you have to retire early through ill health.
Reduced pension if you retire early, although this
can’t be done before age 55.
If you have saved in to a final salary pension
scheme during your career, it will provide you with an
income for your retirement, based on these key factors:
The number of years you have paid into the
scheme Your salary – this may be your final salary
when you retire, or your average salary across
your career.
Your pension scheme's accrual rate – this is a
formula that's used to calculate your final
retirement income.
This accrual rate is a fraction of your salary (usually
1/60 or 1/80), and it is multiplied by the number
of years you have been in the scheme.
Based on how much you
are paid when you retire.
Based on your
average career salary.
Both types of pension provide valuable benefits, the
biggest of which is something called index-linking.
This means your pension income is guaranteed to
increase each year so it keeps up with rising prices in
the future.
Key points
If you have a defined benefit or final salary
scheme, then it is likely to contain valuable
benefits
If you still work in the company that offers the
scheme, speak to it about your pension
If you no longer work for the company, speak
to an IFA about your future entitlement
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