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How is the pension paid by a final salary scheme worked out?
A typical final salary scheme will pay a pension that depends on:
- how long you have worked for the company;
- your salary when you leave the company; and
- something called the scheme's accrual rate.
The accrual rate is the proportion of your final salary that you get for each year you are a member of the scheme. Accrual rates are usually expressed as fractions (1/60th or 1/80th is common) or sometimes as a percentage (e.g. 1/60th equals 1.67%).
To give an example, Lucy retires with a salary of £30,000 after being a scheme member for 20 years. Her scheme has a 1/60th accrual rate. For every year she worked she will get 1/60th of £30,000. This is £500 for each year. So for 20 years' service, her first year's pension will be £10,000. The accrual rate is an important factor in how good a salary-related scheme actually is.
The commonest rate now is probably about 1/80th, although many schemes have cut accrual rates in recent years. Very good schemes will do better with 1/60th or even 1/50th. Poorer schemes may go as low as 1/100th. Of course, more generous schemes will cost more, and employee contributions may be higher than in a poorer scheme.