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What is a final salary pension?

Also known as a "defined benefit scheme", a final salary pension is a type of occupational pension and is directly related to an employee's final salary before retirement.

The scheme pays each member a pension based on their final salary over the last few years before retirement (or on leaving the scheme indexed to their retirement) and on the number of years they had worked for your company.

Calculating final salary pensions

For each year that the member works for your company, they will gain a proportion of their final salary as a pension. It can also provide a tax free lump sum at retirement although taking the lump sum will normally reduce their pension.

For example, a common multiple for a final salary pension is 1/60 for each year of service. If a member works for your company for 40 years, they will accrue 40/60 x their final salary as a pension. This would then equate to two thirds of their final salary as a pension.