Glossary · UK
What is Final Salary Pension?
A type of defined benefit pension that pays a guaranteed retirement income based on a member's salary shortly before retirement or leaving, multiplied by years of pensionable service.
Full Definition
A final salary pension is a specific type of defined benefit pension scheme that calculates retirement income using a member's salary at, or close to, the point they leave the scheme or retire, multiplied by their number of years of pensionable service and a scheme-specific accrual rate (for example, 1/60th of final salary for each year of service). Because the pension promise is defined by a formula rather than by investment performance, the scheme (usually the employer, or in the case of most remaining defined benefit schemes now, a well-funded legacy pension fund) bears the investment and longevity risk, guaranteeing to pay the calculated income for the member's life, generally with annual increases in line with inflation up to a scheme-specific cap. Final salary schemes were once the dominant form of workplace pension in both the public and private sectors but have become increasingly rare in the private sector since the 1990s and 2000s, as employers found the cost and risk of guaranteeing a fixed retirement income unsustainable amid rising life expectancy, volatile investment returns, and stricter funding regulations, leading most private employers to close their final salary schemes to new members, and often to future accrual for existing members, in favour of defined contribution provision instead. Many public sector schemes moved away from a pure final salary basis to a Career Average Revalued Earnings basis instead, which calculates the pension from a member's average salary across their whole career (revalued for inflation) rather than just their salary at the end, generally producing a somewhat lower, but more evenly distributed, benefit for members whose earnings rose sharply late in their career. Because of the value of the guaranteed, inflation-linked income they provide, transferring out of a final salary pension into a defined contribution arrangement is generally discouraged and, for transfers above £30,000, legally requires the member to take regulated financial advice first.