There are two types of final salary pension members ‘Active’ and ‘Deferred’. ‘Active’ is where you have benefits building up in the final salary pension scheme and ‘Deferred’ is where you have rights under the pension scheme but have left the company and or the scheme and you are not getting any more additional final salary pension benefits. As a very simple example:
Mr Smith is in what is called a 60 (ths) final salary pension and is an ‘Active Member’. This means, every year his pension will go up by one sixtieth of his salary when he retires.
So, if we ‘assume’ his ‘final salary’ is £30,000 then every year he is in the scheme his pension will go up by one sixtieth of £30,000 or £500 p.a. This is his final salary pension.
When he does retire, he will have a final salary pension of the number of years in the scheme divided by 60, times by his final salary (£30,000 final salary). So, if we ‘assume’ he does 30 years in the scheme his final salary pension will be:
30 years in the scheme / 60 (ths) which is the same as a half (30/60 is the same as ½ or a half) so his final salary pension will be half of £30,000 or £15,000 per year final salary pension.
This is someone who has left their final salary pension scheme and are not now getting any more additional 60ths (if it’s a 60ths scheme).
Mr Jones worked for XYZ Limited and was in their final salary scheme and left after 10 years on a salary of £20,000. Therefore, his final salary pension will be fixed at 10 years (the number of years he was in the scheme) divided by 60 (so 10/60 or one sixth) multiplied by his salary of £20,000 when he left XYZ Limited:
10/60ths of his final salary of £20,000 will give him a pension of £3,333 per year (10/60 X £20,000). In the years between becoming a deferred member and drawing his benefits, his accrued pension will usually go up every year by a defined amount (often linked to inflation) but usually nothing like the additional 1/60 of his final salary per year if he was still an ‘Active’ member of the final salary pension scheme.
Deferred Member but still employed
Final salary pensions are very expensive for the employer, this is why final salary pensions are sometimes called ‘gold plated’ pensions. Because of this, very large numbers of employers are stopping their final salary pensions, even for their ‘Active’ members / current employees. It is therefore possible to still be employed and to be a ‘Deferred’member of a final salary pension scheme.
It is usually only deferred members who should ever consider a final salary pension transfer.