Understanding final salary pensions; how they work and how you're protected.
Final salary pension schemes have been closing to new members at a record rate, but if your employer still has one, it’s generally worth signing up to.

Recently I’ve received some emails from women who don’t seem too sure about whether or not to join their employer’s final salary pension scheme. With the government’s review of public sector pension schemes and a number of private sector employers planning changes to theirs, the decision may not seem straightforward. But the fact is that a final salary (often called a defined benefit) pension is generally a much better bet than anything else your employer might offer.

How do final salary pensions work?
Final salary pension schemes pay you a pension at retirement that depends on four factors:

• How long you’ve been a member of the pension scheme for.

• How much your ‘final salary’ is or the salary that your pension scheme uses to calculate how much to pay you when you retire.

SAVVY TIP: The reason that people in the pensions industry prefer the term ‘defined benefit’ pension to final salary is that – in an increasing number of cases – the pension you get when you retire won’t be based on the salary you’re earning just before you retire but on an average salary throughout your career or another measure of your salary that’s not as generous as your final salary. There's information about final salary schemes on the Pensions Advisory Service website.

• The accrual rate. Ignore the jargon, it just means the amount of your final salary that you will earn as a pension for every year that you’re a member of the pension scheme. Most schemes will pay you 1/80th of your salary as a pension when you retire for every year that you’re a member of the scheme, while others – which are more generous – pay you 1/60th.

SAVVY TIP: If your pension scheme has an accrual rate of 1/60th it means that you could retire on a pension of two thirds of your final salary if you work for the same employer for 40 years.

• The age at which your pension is paid. More jargon I’m afraid but it’s not too painful, this is called the ‘normal retirement date’ or ‘normal retirement age’. With some employers’ pension schemes you’ll get your pension when you reach 60 and with others it could be earlier or later.

SAVVY TIP: You don’t have to start getting pension payments on your normal retirement date as you should be allowed to delay (or defer, as it’s called) taking your pension up until the age of 75. You may also be allowed to take your pension early if you retire due to ill health etc.

When can my employer make changes?
At the moment fewer than one in four private sector pension schemes are open to new members and many employers are trying to make changes to reduce the costs and – in particular – the risk that they’ll be committed to making pension payments that they can’t afford in the future. There are different rules protecting public sector pensions.

There are some rules in place to protect pension scheme members, but as it’s the employer who pays pension contributions on your behalf they do have the right to make changes.

SAVVY TIP: Pension scheme trustees run the private sector defined benefit schemes on behalf of the employer and they'll normally be made up of a number of senior managers from the employer but they must also include at least a third of trustees who have been nominated by the pension scheme members. The employer has several options including:

• Closing the scheme to new members. This means that if you’ve already joined the scheme you can continue to make payments towards your pension but no one else will be allowed to sign up to it.

• Asking pension scheme members to increase the amount they pay into the scheme. If the employer believes that it can’t afford to pay pensions in the future it can ask members to increase the amount they pay.

• Reducing the accrual rate. An employer could move from an accrual rate of 1/60th to 1/80th or even to something less generous.

SAVVY TIP: If your employer wants to make changes to the benefits that ‘new’ money, will buy, for example, to say that in the future you’ll have to pay 8% of your salary into the pension scheme as opposed to the current rate of 7%, they have to consult members about this.

What does the consultation process involve?
The pension trustees must set out – in clear terms – what the changes could mean and why you’re being asked to make them. You’re then given four weeks in which to comment or challenge the changes.

SAVVY TIP: Even though your employer has to go through a consultation process, according to Tony Attubato of the Pensions Advisory Service, SavvyWoman’s state and company pensions expert, they doesn’t have to take any notice of what’s said! If they believe the changes have to be made, they have the right to go ahead with them. What they can’t do is make any changes that would affect the pension that those who have already retired or those who have left the scheme (called ‘deferred members').

How safe is my pension?
There’s been a lot in the media about pension scheme deficits over the last couple of years and in the early 2000s a number of pension schemes went bust and those who’d paid into them but not retired stood to lose most of their pension.

It’s important to understand two things; firstly, just because a pension scheme has a deficit doesn’t mean it’s about to fail and secondly, since 2005 there’s been a protection scheme in place, called the Pension Protection Fund which will pay out if your pension scheme goes bust.

SAVVY TIP: The Pension Protection Fund doesn’t guarantee to pay out 100% of the pension you were due if your employer’s pension scheme goes bust before you starting receiving your pension. So if you’re a high earner in a final salary scheme, you could lose out if the scheme fails. It’s not a reason not to join a defined benefit scheme, but it is worth being aware of.

• If you’ve already retired or are already receiving a pension from your employer, the Pension Protection Fund will pay 100% of your pension.

• If you’ve not yet retired the Pension Protection Fund will pay 90% of your pension at age 65 up to a value of £29,897.42 (including the cap).

SAVVY TIP: The pension compensation amount is set each year and varies according to the age at which you’re paid your pension.

Related articles:

Keeping track of your company pensions

Topping up NI contributions for your state pension

What to do with your tax free pension lump sum

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Posted by SJ dated 2010-09-29 11:46:59
what happens to your final salary pension scheme if you only have worked for your employer for one year and then leave or are made redundant? Can you continue the scheme by adding to it as and when you wish independently even if you start working elsewhere?
Posted by Sarah Pennells dated 2010-09-30 16:03:09
Hi SJ, Thanks for your question. I put this to Tony Attubato of the Pensions Advisory Service and here's what he has to say: If you leave a final salary scheme and you’ve had at least two years' membership, the scheme must set up a pension for you for payment at the scheme's retirement age. If you've been a member for less than two years the scheme can refund your premiums instead if it wishes.

If you’ve been a member for more than three months and are more than one year away from the scheme’s retirement age, you must also be offered the option of a transfer value, which can be paid into another pension scheme. Whatever the rules about refunds you cannot continue to pay into a final salary scheme once you leave the service of the sponsoring employer.
Posted by CATH dated 2013-04-12 22:20:01
What happens if my salary is going to reduce whilst a member of a final salary pension scheme? e.g i am moving job within the same council but will be earning £5k less? The company has a benefits calculator which tell me on my salary i would earn £5k a year pension at my present salary but instructs me that i wlll only earn £4300 on my new salry having the same 10 years service
Posted by Sarah Pennells dated 2013-04-15 06:52:57
Hi Cath, Thanks for your question. The answer will depend on how your pension scheme works out your 'final salary'. It isn't always the last salary you earn as the title suggests. It may be the highest salary you earned for three consecutive years out of the last ten, or the highest salary you earned in the last five years before you reach the normal retirement date (the date you are expected to take your works pension). It may be calculated in a different way. As you've used your company's benefits calculator, it does sound like you may get a lower pension from your salary, but I'd suggest you get this in writing from HR or your pension scheme. A drop in pension from £5,000 to £4,300 is quite sizeable (as I'm sure you know) and adds up to around £17,000 over 25 years. If you want to talk to an expert about this, I'd suggest you contact the Pensions Advisory Service on 0845 601 2923. It's a free to use government service (Tony Attubato, from the service is one of the experts on Sa
Posted by LIS dated 2013-06-16 23:34:12
I am a deferred member of a final salary scheme (having left he firm last year) which I have just learnt is entering the PPF as the company seems to have changed management suddenly and may have gone into administration - all news from the press, I haven't been contacted by the pension scheme yet. I had originally hoped to take my pension early (at 55 next year) obviously at a reduced rate. Is this still possible under the PPF rules, as it was under the scheme rules? Or do I have to wait until I am 65(66). Nothing appears on the PPF website, about this query. Thank you for any info available.
Posted by Sarah Pennells dated 2013-06-17 13:41:46
Hi Lis, Thanks for your question. I've had a look at the Pensions Protection Fund website and the information seems to say there isn't a problem taking your pension from age 55. One link to the information is here: and there's more information here: If you copy and paste the links, you'll be able to access the information. I hope it is helpful to you.
Posted by michael harford dated 2015-03-22 07:26:00
Dismissal on grounds of ill health I.e. Multi level disk my company final salary scheme refuses to give enhanced pension are they allowed to do this

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