What's a Final Salary Pension and How's it Calculated?

blog-publish-date

18 Dec 2018

blog-read-duration

Employees often look for businesses who offer final salary pensions. Many professionals consider it to be the best available on the market.

In this guide, we explain what type of scheme it is, how it works, and the information you'll need to provide your staff members.  

What's a final salary pension?

It's a post-retirement workplace pension scheme based on the employee’s salary at retirement, rather than the average salary across their career.

This is desirable as the professional has access to a much larger amount of savings.

The new rules

New rules state you must automatically put any new starter into your workplace scheme. This is unless a staff member explicitly states they don’t want to join.

Auto-enrolment has to meet minimum requirements, but you can still provide that that’s better than the minimum.

The new rules entitle workers earning above a particular amount to receive minimum contributions to their retirement pot.

With auto-enrolment, you have to put in a minimum contribution, and so does your employee. The government doesn’t add anything, but there is a tax relief at a later date.

The government is due to make a basic contributions rise to 8% in April 2019. The totals are:

  • 3% from the employer.
  • 5% from the employee.

Common questions

Here are answers to some common questions professionals have:

  • How much will my pension be?

You and the employee must pay regular workplace contributions for it to be valid.

For auto-enrolment, you have to meet the minimum contribution set by the government.

There isn’t a maximum contribution you must make, but there's a cap on how much you can pay and still have the staff member receive tax relief. It's £40,000, or 100% of their income. It depends on whichever is higher.

For a final salary pension, you can calculate the amount by taking the final salary figure, multiply that by the accrual rate (usually 1/60), and times the number of your roles the employee has had.

  • Can I cash in my pension?

The answer to this is yes, but doing so will land the employee with a large tax bill. They can take 25% immediately and tax-free. The extra 75% is subject to tax.

  • Can I cash in a pension from an old employer?

Again, the answer is yes, but it'll result in a large tax penalty for the employee if they're under 55.

Help your staff understand their options

Keeping your staff in the loop when it comes to their pension is the best way to avoid complications and awkward questions.

Be honest and upfront when addressing concerns, involve them in any changes, and make sure they are aware of the amount contributed each month.

There are circumstances where an employee can take their savings early, such as if they're terminally ill. In these scenarios, it's good business practice to be understanding and discuss the available options. 

Expert Support

If you’re particularly uncertain about the logistics of a final salary pension, you should seek expert advice. You can speal to us today on 0808 145 3374.

Free to Download Employer Resources

  • Sample Health & Safety Communication and Consultation Policy

    FREE DOWNLOAD

    Sample Health & Safety Communication ...

    Download Croner's sample health & safety communication and consultation policy, here.

    Read more
  • Adverse Weather Policy

    FREE DOWNLOAD

    Adverse Weather Policy

    Here we’ve included a free sample adverse weather policy that UK business owners can refer to...

    Read more
  • Sample Data Protection Policy

    FREE DOWNLOAD

    Sample Data Protection Policy

    Here we’ve included a free sample data protection policy that UK business owners can refer to...

    Read more
  • Health & Safety Changes to Look Out For in 2019

    BLOG

    Health & Safety Changes to Look Out F...

    The news at the start of this year has been dominated by Brexit and its potentia...

    Read more
  • Understanding Wage Differentials and Identifying Factors That Affect It

    BLOG

    Understanding Wage Differentials and ...

    The first step to understanding wage differentials is knowing the distinction be...

    Read more
  • Is Sitting the New Smoking?

    BLOG

    Is Sitting the New Smoking?

    Did you know that people who sit for 13 hours a day have a 200% greater risk of ...

    Read more
  • Solicitors Benevolent Association

    CASE STUDY

    Solicitors Benevolent Association

    “The reason for using Croner was the high-profile track record and the credibili

    Read more
  • John Taylor Hospice

    CASE STUDY

    John Taylor Hospice

    “A large number of the queries are around employment law and rights in areas suc

    Read more
  • Motorsport Industry Association

    CASE STUDY

    Motorsport Industry Association

    “I’m so happy with the service Croner provide, I’d be hard pressed to find a fau

    Read more

Ready to focus on what you do best?

Get your free consultation and speak to an expert today.