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

Clare Parkinson


18 Dec 2018


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 speak to us today on 01455 858 132.

About the Author

Clare Parkinson has over 20 years’ experience in the Croner Reward business. As Business Manager, Clare leads a team of Reward Consultants who specialise in the delivery of pay and grading related advice, including tailored pay benchmarking and gender pay reports.

Over the years, Clare has contributed to various industry publications on topics such as gender pay, executive remuneration and market pay trends.

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