Company Pensions: Final Salary schemes
The 'Final Salary' scheme
With a final salary scheme, the pension you receive at retirement is related to your final salary before retirement and the number of years service you have with that particular employer. A final salary in the years just before retirement is often the highest salary an employee has achieved with a particular employer, coupled with several or many years of service this method of calculating retirement benefits can secure a very good pension for the rest of an ex-employees life. Upon retirement pension benefits can be secured with the provision for a spouse of dependants pension, inflation proofing or escalation of income and of course the payment of a Tax free lump sum, which can greatly help in those early years following retirement when a former employee retires and experiences a drop in salary
Company Pensions: Final Salary schemes
The 'Final Salary' bit.
With a final salary scheme, the pension you receive at retirement is directly related to your final salary before retirement. This is a benefit because it means you will have a very good idea of what your pension income will be before you actually retire.
A final salary scheme can pay up to two thirds of your final salary when you retire, up to a maximum of £102,000. It can also provide a tax free lump sum at retirement, up to a maximum of one and a half times your final salary. Taking the lump sum will normally reduce your pension.
Benefits included
Many final salary schemes have a host of additional benefits such as death in service benefits of up to four times annual salary. Widow's and dependent children's pensions, known as death in retirement benefits and often long term disability benefits are all in addition to the salary related pension already mentioned.
Many companies increase the actual pension payments by approximately 3-5% per annum. This alone is a very valuable benefit that would be costly with a money purchase type scheme.
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