WHAT DOES FINAL SALARY PENSION MEAN?

If you’re on the final salary pension scheme, your retirement may seem all panned out and straightforward. But you still have to make critical choices and understand the amount of retirement income you will get. For instance, you can review your pension agreements to gain more confidence in the future, whether your retirement is some years away or just around the corner.

What is a final salary pension?

Final salary pension is often perceived as the gold standard due to its favorable terms. In this kind of scheme, your retirement income is defined and protected, and the benefits are favorable compared to other types of pension schemes. 

The primary alternative is the defined contribution pension scheme whereby both the worker and the employer make contributions that benefit from tax relief then they are invested. So, upon retirement, as a member, you have a large lump sum based on your contributions and performance regarding investment. Also, you have to decide how to access the retirement fund to ensure it lasts you for a lifetime.

But in the final salary pension, your retirement income is defined right from the start. The pension income depends on your years of service in the scheme and your final or average salary. So, upon retirement, the pension scheme pays a regular amount for life.

Benefits of a final salary pension

Some of the benefits of a final salary pension include:

  • A lifetime income- with a final salary pension, you have a guaranteed income for life. With life expectancy challenging planning for retirement, a final salary pension eliminates the uncertainty of not knowing how long your pension payout will last.
  • No responsibility for investments- in final salary pension schemes, the board of trustees decides where to put your pension funds. That also means the performance of the investments does not impact our fina retirement income at any point.
  • The income is inflation-linked- final salary pension is inflation-linked. That means that the retirement income rises with the cost of living in addition to a lifelong income.
  • Additional benefits- most final salary pensions have extra advantages like pension for your dependants if anything happens to you. 

Creating flexibility with final salary pension

Although a final salary pension gives you a secure income throughout your life, you may want flexibility with your income to meet your retirement goals. You may want to spend more during early retirement or later in life. For example, you want to travel, cater to a mortgage payment, or take care of your loved one financially. So there is a way to achieve that.

A final salary pension can allow you to take one lump sum from your pension fund to start your retirement. That minimizes your income during retirement but gives you the flexibility you need for some capital. You can use other options such as:

  • Use your assets to create a flexible income.
  • Use a defined contribution pension to fund a one-off expense.

The bottom line

A final salary pension is a long-term investment that gives you secure income throughout your retirement. Therefore it helps provide security and certainty during retirement.