What is a final salary pension?
Your final salary pension, which can also be known as your defined benefit pension (db pension) is a guaranteed form of income for life after retirement.
The actual value of your final salary pension is dependent on several factors; including a percentage of your final salary, how many years you have been a part of the pension scheme and an accrual rate.
DB pensions differ from defined contribution pension schemes wherein your final income is dependent on contributions plus the performance of any investments you may have made.
How does a final salary pension work?
Your final salary pension scheme will provide you with pension benefits depending on several factors, including your earnings and duration as a member of the scheme. However, the rules vary between different schemes, so it is important that you check the terms of your specific scheme for your own circumstance.
The benefits that are provided to you at retirement may be either an income or a tax-free cash lump sum with an income alongside that.
Should you become seriously ill which leads to an early retirement or ill-health retirement, you may be eligible to draw your pension benefits earlier than usual. However, the amount that you may be entitled to receive could be lower than the amount you would otherwise receive if you carried on working until the normal retirement age.
If you have to retire early due to ill-health, it is worth checking with a financial advisor or the pension scheme administrator about the benefits you may be entitled to receive.
This video might also be useful to understand how a final salary scheme works.