Final salary occupational pension schemes – also known as ‘defined benefit occupational pension schemes’ – are set up by employers to provide employees with a fixed and guaranteed pension for life. Some schemes are operated on contributory basis, where the employee also pays in to the scheme (a ‘contributory’ scheme) and some require no contribution from the employee (a ‘non contributory’ scheme).
Final salary schemes are run by trustees who are responsible for looking after scheme members’ interests but it is the employer’s responsibility to make sure there are always sufficient funds available in the scheme to pay benefits as employees retire.
Although HM Revenue & Customs restrict the amount of pension payable, and assuming the employee waives their entitlement to a tax fee lump sum, employees can expect their retirement income to amount to one-sixtieth of their final salary for each year of membership – i.e. up to two thirds of the employee’s final, basic salary. Essentially the longer an employee works for the same employer, the more favourable the final salary percentage will be on retirement.
If a scheme member moves to a new employer, it is possible for the employee to move their money purchase pension to their new employer’s scheme. Or the employee can leave their money purchase pension with their previous employer and the pension then becomes a ‘preserved’ or ‘deferred’ pension.