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Final-Earnings Basis
A final pay or final salary scheme provides a pension which is a proportion of final pay at or shortly before retirement. The proportion is calculated by allotting a percentage or fraction of final pay for each year of service, so that the pension will usually be larger than with an unrevalued average earnings scheme. Moreover, since most people's real salary rises with age, a 'final salary is usually a better basis than average salaries revalued.
Example
You are entitled to a pension of 1.25% of final salary for each year of your service up to a maximum of 40 years. You retire after 20 years' service. Your pension will be:
20 x 1.25% (a total of 25%) of final pay.
Had the fraction been 1/60th, and if you had competed 30 years' service, your pension would be 30/60ths or half final pay.
It is important to look at how 'final pay' is defined in your company's pension rules. It may be defined in one of many different ways, such as earnings in the last complete year of service, or average over the last three years, or the average of the best three out of the last five years, and so on.
Benefit-related Schemes
More than 11 million people are members of occupational pension schemes of the benefit-related type. These are schemes set up by employers to provide pension and life assurance benefits for their employees in addition to those under the National Insurance scheme.
The most common ways of calculating pensions are either as a percentage of 'final' earnings before retirement or, less commonly, as a percentage of average earnings throughout service.
Average-earnings basis
This basis may be explained by means of a table showing, year by year, the amount of pension that has... see: Benefit-related Schemes