Occupational salary-related schemes
Some employers offer these schemes, also called final-salary or defined-benefit schemes. Find out about the benefits and risks of these schemes. They usually provide a pension based on:
- the number of years you have been a member of the scheme (known as pensionable service);
- your pensionable earnings (often averaged over the last three years before retirement); and
- the proportion of those earnings you receive as a pension for each year of membership (called the accrual rate). The most common accrual rates are 1/60th or 1/80th of your pensionable earnings for each year of pensionable service.
The scheme is run by trustees who look after scheme members’ interests and your employer contributes to the scheme.
Your employer is responsible for ensuring there is enough money at the time you retire to pay you the pension, but see 'Risks in these schemes' below.
Example
Bill belongs to an occupational pension scheme at work. It is a salary-related scheme. The accrual rate is 1/60th. This means Bill can expect a pension of 1/60th of his pre-retirement pensionable earnings for each year he belongs to the scheme.
Bill retires at 65 on a salary of £24,000 a year, having been in the pension scheme for 10 years.
His pension is: 10 x £24,000 divided by 60 = £4,000 a year (less if he takes any lump sum).
What you need to think about
Think carefully if you are planning not to join your employer's pension scheme. It is not usually a good idea to turn down a pension scheme to which your employer will contribute on your behalf.
The benefits of these schemes are that:
- your pension benefits are linked to your salary while you are working, so they automatically increase as your pay rises;
- your pension entitlement is not dependent on the performance of the stockmarket or other investments;
- the pension scheme will normally increase your pension income each year in line with the Retail Prices Index (RPI) or a set percentage, whichever is the lower.
Risks in these schemes
Some salary-related occupational schemes have been in the news because the employer has become insolvent and there wasn't enough money in the employer's pension scheme to pay the pensions it had promised to its current and former employees.
The government set up a Pension Protection Fund in April 2005 to protect members of salary-related schemes. The fund pays some compensation to scheme members whose employers become insolvent and where the scheme does not have enough funds to pay members' benefits. The level of compensation may not be the full amount. For more information visit the Pension Protection Fund website – see Related links.
Changing jobs
If you change jobs, you stop paying into the pension and can leave it where it is (called a preserved or deferred pension). Alternatively you may wish to transfer it to your new employer, but there are risks and costs associated to that. You should take advice if you are thinking of transferring your pension. For more information get a free copy of our Pension transfers booklet. You can download or order it online – see 
Free printed guides.