Final Salary Pensions – Why Some Are Worth More Than Others



Posted on: 8th August 2015

Final salary pensions were at one time a pretty attractive and somewhat standard option on the cards for those working with high-profile brands and businesses.

However, as time moves forward there’s an increasing contingency of businesses that are closing such schemes to new members and slowly but surely walking away from the idea.

As for why? Well, it largely comes down to a combination of both stock market instability and the fact that people are living longer than ever before. These two factors added together breed a scenario where many decision-makers have decided that final salary pensions are both risky and costly – too much for them to continue being offered.

Nevertheless, some companies do continue offering final salary pensions and there are tens of thousands of people already enrolled in such schemes, so what’s the story for those either curious about their scheme’s status or considering getting involved?

The Basics of Pensions.

In the simplest of terms, a final salary pension plan is a scheme whereby the salary an individual is paid during their final year in work is used to calculate their retirement income. More often than not, their final salary is divided by 60 with the resulting figure then being multiplied by the number of years they’ve held the policy for. More often than not, those with such schemes tend to come out with half to two-thirds of their final salary as an annual pension payment, though the sum can be far greater or lower than this. 

The Gradual Phase-Out

As already touched upon, more companies than ever before are slowly but surely phasing out these kinds of pensions – primarily because people are living so much longer. The longer you live, the longer they have to go on paying you and thus the higher the costs to the business become. In addition, investments made to fund these kinds of pensions are becoming riskier and returns generally lower, which is why it now tends to only be those ultra-secure and wealthy businesses than can afford to continue offering final salary pensions.

How Closure May Affect You

When a business decides the time has come to close its final salary pension scheme, there are two ways they can go about this. The most common type of closure is that which does not in any way affect existing members, but instead simply prevents any new members from signing up. The second type of closure is where the scheme as a whole is shut down and its members and their funds are transferred to different, generally less lucrative schemes.

In both cases however, any funds that have been built up to the date at which the closure takes place will be safe and protected. Where they may be taken following the closure is impossible to say, but it’s unlikely that losses will ever be incurred while the company remains liquid.

Seeking Advice

It’s always worth seeking the advice of an independent financial advisor should any changes to your pension plan leave you in a situation where you may end up facing a shortfall on your initial retirement-pot expectations. There are always options on the cards and avenues to explore, so it’s a good idea to ask for a few pointers.