Final Salary Schemes
A 'final salary' pension scheme provides benefits that are linked to the length of membership, and pensionable earnings at or close to retirement. A final salary scheme is a type of 'defined benefit' scheme as the benefits are worked out according to a formula.
The cost of providing this type of scheme depends on a lot of different factors - members' salaries, inflation, investment returns, how long members might live are just a few. An actuary looks very closely at scheme funding every three years to check the contributions are sufficient. Employers offering this type of scheme have to be prepared for costs to change regularly.
Final salary schemes can offer:
- The option to exchange some pension for a tax-free cash lump sum.
- Lump sum benefits on death-in-service.
- Survivor's and children's pensions after the member's death.
- Pension increases after retirement.
- Ill-health early retirement benefits.
- Member contributions can be either fixed or age-related (provided age discrimination regulations are observed). Occasionally schemes are non-contributory.
- The option to pay Additional Voluntary Contributions (AVCs) to buy additional benefits.
- Provided it meets minimum requirements, a scheme can be contracted-out of the State Second Pension, which means lower National Insurance contributions for employer and members.