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.

Note: This content is provided as general background information and should not be taken as legal advice or financial advice for your particular situation. Make sure to get individual advice on your case from your union, a source on our free help page or an independent financial advisor before taking any action.