What is a Final Salary Pension?
When it comes to planning for retirement, understanding your pension options is key to making informed decisions. One term you may have come across is a final salary pension. But what exactly does it mean, and how does it compare to other pension schemes?
In this blog, we’ll explain what a final salary pension is, how it works, and why it can be one of the most valuable retirement benefits available. We’ll also explore what to consider if you’re thinking about transferring your pension to another scheme.
What is a Final Salary Pension?
A final salary pension, sometimes referred to as a defined benefit pension, is a type of workplace pension that promises to pay you a guaranteed income for life after you retire. The amount you receive isn’t based on how much you’ve contributed or how well your investments perform, but rather:
Your salary (typically your final or career-average salary).
The number of years you’ve been a member of the scheme.
Because of this, final salary pensions offer a level of financial security in retirement that’s increasingly rare.
How is the Income Calculated?
The amount you’ll receive from a final salary scheme is based on a formula. While the exact details vary between schemes, most follow a similar structure:
Annual Pension = Final (or average) Salary × Years of Service × Accrual Rate
Here’s an example:
Final salary: £40,000
Years in the scheme: 25
Accrual rate: 1/60 (a common rate)
£40,000 × 25 ÷ 60 = £16,666 per year
This income is usually paid for life and may include annual increases to keep up with inflation.
What are the Benefits?
Final salary pensions are often considered the gold standard of pensions - and for good reason. Here’s why:
Guaranteed income for life
You know what you’re going to get, which makes planning much easier.Inflation protection
Many schemes include yearly increases to help your income retain its value.Survivor benefits
Most schemes offer some form of income to a spouse, civil partner or dependent after your death.No investment risk
Unlike defined contribution pensions, your future income doesn’t depend on market performance.
Are Final Salary Pensions Still Offered?
While they were once common in both the public and private sectors, final salary pensions have become less widespread - especially in the private sector. This is largely because of the long-term costs to employers. Today, most new workplace pensions are defined contribution schemes, which work very differently.
If you’ve worked in the public sector (such as the NHS, teaching, or civil service), or for a large private firm in the past, you may have a final salary pension without realising it.
What Happens When You Retire?
When you reach the scheme’s normal retirement age, you’ll usually start receiving your pension as a regular monthly income. You may also have the option to:
Take a tax-free lump sum (by giving up part of your annual income).
Start your pension early or defer it, depending on the scheme rules.
It's worth noting that starting your pension early could reduce the amount you receive, while deferring it might increase your income.
Can You Transfer a Final Salary Pension?
Yes, but it’s not a decision to take lightly.
You can transfer your final salary pension into a defined contribution pension, giving you more flexibility over how you access your money. However, you’ll be giving up a guaranteed income for life in exchange for a lump sum - and taking on the investment risk yourself.
Because of the risks involved, if your final salary pension is worth more than £30,000, you must take regulated financial advice before transferring. And even if it's below that threshold, speaking to a qualified adviser can help you make a decision that suits your long-term goals.
Things to Consider Before Transferring
Are you comfortable managing your own retirement income?
How long do you expect to live? Final salary pensions pay out for life.
Do you need more flexibility?
Are there any health or family circumstances to factor in?
What are the tax implications?
For some people, transferring makes sense. But for many, the guaranteed income and security of a final salary scheme are worth holding on to.
Final Thoughts
A final salary pension offers a dependable income for life, often with inflation protection and survivor benefits. It’s a valuable asset that could play a central role in your retirement planning.
Whether you’re approaching retirement or reviewing your pensions, it’s important to understand what kind of scheme you have and what your options are. Decisions like whether to transfer out of a final salary scheme should always be made with expert advice.
A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.
Inheritance tax planning and Trusts are not regulated by the Financial Conduct Authority.
Approved by InPartnership FRN 192638 August 2025