A final salary, also known as a defined benefit (DB), is a pension scheme that gives a payout to an employee based on his or her earnings and years of service.
Final salaries are most often provided by the health and education sector and by the government. Some private sector employers still offer them.
A final salary is often seen as an attractive option as it provides you with a guaranteed annual income for life.
When you have a final salary pension scheme, it means that your employer pays into a fund on your behalf. The amount you’re paid will depend on a number of things. Some schemes don’t count additional earnings, such as overtime, commission and bonuses. The final salary you’ll have is defined by a certain number of rules. These rules will define the calculation of your ‘salary’ or earnings.’
With a final salary scheme, you have a choice: having more money at the present moment, versus having guaranteed income for the rest of your life.
Final salary pensions can be accessed at an earlier age. Your unspent pension may be left for inheritance free of inheritance tax. Another advantage is that your pension is not at risk if your former employer becomes insolvent. There are other factors to consider. Study your options carefully.
You will, in all likelihood, have to pay for advice on how to attain the final salary. After that, you will be responsible for managing your pension. Do your research.
When you join the final salary scheme, you will obtain a booklet with details of the benefits. You will find all your answers in this booklet.
It depends. Take note that not all final salary schemes are transferrable. The only kind you can transfer are private sector schemes and some public sector ones that are supported by a central fund. You can’t transfer certain public sector schemes which are supported directly by the taxpayer.
Dependents may also receive a pension should you pass away. Final salary pensions will usually pay around 50% of your pension to your spouse or a dependent, depending on which scheme you’re in. Inheritance rules differ from scheme to scheme.
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