{"id":456922,"date":"2022-07-15T11:44:23","date_gmt":"2022-07-15T10:44:23","guid":{"rendered":"https:\/\/www.finder.com\/uk\/?p=456922"},"modified":"2026-05-11T02:28:01","modified_gmt":"2026-05-11T01:28:01","slug":"final-salary-pension","status":"publish","type":"post","link":"https:\/\/www.finder.com\/uk\/pensions\/final-salary-pension","title":{"rendered":"Defined benefit and final salary pensions"},"content":{"rendered":"

If you\u2019ve spent any time rummaging round Finder\u2019s pension advice, you\u2019ll know that saving for retirement is vital if you want to live well in later life. And if you have the chance to save into a final salary scheme, you\u2019re one of the fortunate few. These so-called \u201cgold-plated\u201d pensions guarantee you an income for life based on a portion of your salary. Plus, they usually pay an income to your dependants even after you die. Here\u2019s what you need to know about defined benefit pensions.<\/p>

What is a defined benefit pension?<\/h3>

A defined benefit pension is a type of workplace pension scheme<\/a> that pays out a fixed, regular income when you retire. This income is based on a proportion of your salary while you were working for an organisation. They\u2019re known as defined benefit because the benefit (or pension income) you will receive is set in advance, based on the rules of the scheme. How much income you\u2019ll get depends on your salary and how long you were a member of the scheme. <\/span><\/p>

These days, defined benefit pensions are increasingly rare, especially for new employees. Most workplace pensions are now defined contribution pensions<\/a>. They\u2019re called this because the amount you contribute towards your pension is the only known factor. Contributions are invested on your behalf. They\u2019ll build up into what\u2019s commonly called a \u201cpension pot\u201d. You can decide how to use this pot when you reach age 55. Its value will depend on how much you contribute and how well your pension investments perform.<\/p>

What are the different types of defined benefit pensions?<\/h3>

There are 2 main types of defined benefit pension. Both guarantee you an income as a proportion of your salary. However, they work in slightly different ways. In both cases, the income you receive will depend on how long you were a member of the scheme.<\/p>

  1. Final salary pensions<\/strong> are based on how much you are paid when you retire (or when you leave the scheme if this is earlier).<\/li>
  2. Career average pensions<\/strong> are based on an average of your salary during the time you were a member of the scheme.<\/li><\/ol>

    As with defined contribution pensions, both you and your employer will typically make monthly contributions to the scheme. Those contributions are then invested. However, unlike defined contribution schemes, you don\u2019t bear the risk of receiving less income if the investments perform badly. With both types of defined benefit pension, your employer is responsible for making sure there\u2019s enough money in the scheme to pay your pension income when you retire. That\u2019s regardless of investment performance.<\/p>

    How is final salary pension income calculated?<\/h3>

    With a final salary pension, your annual retirement income is calculated by multiplying your salary at the point you left the scheme by how long you\u2019ve been a member of the scheme, then dividing by something called the \u201caccrual rate\u201d. The accrual rate is a fraction of your pensionable pay and is set by the scheme. Typical rates are 1\/60 or 1\/80.<\/p>

    The bigger the fraction, the more you\u2019ll receive in retirement. So, 1\/60 is a better accrual rate than 1\/80.<\/p>

    To illustrate this point, here\u2019s how the final salary calculations would work based on someone with the same salary and length of scheme membership, but different accrual rates:<\/p>