In a final salary pension scheme, the retirement income you are paid is based on your salary and the years you have worked for your employer or company. The payouts are a secure income for life that increases every year due to the rising living costs. Many civil servants or workers for large companies have final salary pensions. 

What happens is that your employer contributes to your pension fund to ensure you have enough pension money upon retirement. You can contribute to the scheme too, but that may differ from one pension scheme to another. The good thing is that your spouse or dependant continues to get your pension payouts if you die. 

How it works

Usually, the final salary pension is categorized into two; career average schemes and final salary schemes. A board of trustees coordinates final salary pension schemes on behalf of the employee. The board members are responsible for all the aspects of the pension scheme, such as paying out retirement income to the members.

The scheme administrator oversees the day-to-day management of the pension scheme and reports to the board of trustees. When calculating your pension benefits, it depends on whether you are in a final salary scheme or a career average scheme.

Final salary schemes

A final salary pension is based on the total amount you earn by the time you retire or leave the scheme. Here, your pension is calculated by multiplying your length of service with your final salary. The final salary can be a median of the wages of your last years. Then the result is divided by a fraction, for example, 1/60th of your pensionable earnings, known as the accrual rate.

If you want a lump sum, you might have to give up some income, or a final pension lump sum might be paid with your pension.

Career average scheme

This is a pension calculated according to the average of your pensionable payouts throughout the years you have been a member in the scheme revalued based on inflation. So the value of the pension you have earned every year is calculated through a fraction, say 1/60th of your pensionable pay, known as the accrual rate. The entire pension is calculated by the sum of all the revalued pensions you have earned every year as a member.

The laws of the pension scheme dictate what is meant by your salary or earnings and the calculation method of the final salary or earnings. Some pension schemes don’t factor in extra earnings such as commissions, overtime, or bonuses. 

Taking your final salary pension

A final salary pension scheme usually has a standard retirement age, most often 65years or depending on the state’s pension age. But it could differ from one pension scheme to another. 

In some schemes, you can take your pension from 55years old, but this option reduces the amount of pension you get. So it is possible to apply for your pension payouts before retiring. On the other hand, you can delay your pension payouts which means you get more in the end, but you should check your scheme’s rules for more details.