What Is a Final Salary Pension?

What Is a Final Salary Pension?

A final salary pension — also known as a defined benefit pension — is a type of workplace pension that promises to pay you a guaranteed income for life once you retire. Unlike modern pensions, where your retirement income depends on how much you’ve saved and how your investments perform, final salary pensions are calculated using a fixed formula based on your salary and length of service.

Once considered the gold standard in retirement provision, final salary pensions are now closed to most new members, particularly in the private sector. However, millions of people in the UK still have them — and they remain one of the most valuable financial assets a person can hold.

How does a final salary pension work?

A final salary pension pays out a regular, guaranteed income from your retirement age for the rest of your life. The amount you receive is based on:

• Your final salary (or sometimes your career average salary)

• The number of years you’ve worked for the employer

• The scheme’s accrual rate (commonly 1/60th or 1/80th)

Here’s a simple example:

If your final salary was £48,000, you worked for your employer for 30 years, and the scheme had an accrual rate of 1/60th:

30 ÷ 60 × £48,000 = £24,000 per year guaranteed for life

This income is unaffected by stock market performance and usually increases each year in line with inflation.

Who gets a final salary pension?

Final salary pensions are offered by employers and are now primarily found in the:

• Public sector – NHS, teachers, police, civil servants, armed forces

• Older private sector schemes – Mainly large employers with legacy pension schemes

Most private sector final salary schemes are now closed to new members, and many are closed to future accruals — meaning you stop building up new benefits, but existing entitlements remain protected.

If you’ve worked in the public sector or for a large employer in the past, you may already have final salary pension benefits, even if you’re no longer employed there.

How are final salary pensions different from defined contribution pensions?

Feature

Final Salary Pension (Defined Benefit)

Defined Contribution Pension

Income in retirement Guaranteed for life Depends on contributions & investments

Investment risk Taken by the employer Taken by you

Income certainty High Variable

Flexibility Low (fixed income) High (drawdown, annuity, lump sums)

Death benefits Often reduced spouse’s pension Can pass full pot to beneficiaries

What are the tax rules?

Final salary pensions are subject to the same tax principles as other pensions:

• You can usually take 25% of the value as a tax-free lump sum, with the rest paid as taxable income

• Pension income is taxed as regular income under PAYE

• There's no tax relief on the pension itself at retirement, as the tax advantages came during the saving years

Although the Lifetime Allowance has been abolished, there are still limits on the maximum tax-free lump sum you can take — typically capped at £268,275, unless protections apply.

Can you transfer a final salary pension?

Yes — but only if you haven’t started drawing it. In this case, you may be offered a Cash Equivalent Transfer Value (CETV) to move the value into a defined contribution scheme, such as a SIPP.

However, transferring a final salary pension means giving up:

• A guaranteed income for life

• Inflation protection

• Spouse or dependant’s benefits

Because of the risks involved, if your CETV is over £30,000, you’re legally required to take regulated financial advice before transferring.

In most cases, staying in the scheme is the safer and more beneficial long-term option — especially for those without significant other retirement assets.

What happens when you retire?

You’ll typically receive:

• A monthly pension income, paid directly into your bank account

• Possibly a lump sum if your scheme allows one

• Annual increases to help your income keep pace with inflation

Most schemes have a Normal Retirement Age (NRA) between 60 and 65, but some allow for early or late retirement with adjusted benefits.

Final salary pensions usually also provide:

• A spouse’s or partner’s pension upon your death (typically 50% of your pension)

• A guarantee period, where your pension continues for a set time even if you die shortly after retiring

What are the advantages?

Reliable, inflation-linked income for life
No investment decisions or risk
Protected by law and regulated bodies
Often includes valuable death benefits
May be worth hundreds of thousands of pounds in long-term value

What are the disadvantages?

Lack of flexibility – You can’t access the pot like a SIPP or drawdown pension
Usually no inheritance for children beyond a spouse’s pension
Not suitable for passing on wealth
Transfer options are risky and can lead to loss of benefits
Tied to scheme rules – You can’t adjust investment choices or take early access easily

What if the scheme runs into trouble?

Most final salary pensions are well funded and strictly regulated. However, if a sponsoring employer becomes insolvent, your pension is protected by the Pension Protection Fund (PPF).

The PPF pays:

• 100% of your pension if you’re already retired and above your scheme’s normal pension age

• 90% of your pension if you’re below pension age (subject to a cap)

While it may not cover every benefit, the PPF offers a significant level of protection.

Final thoughts

A final salary pension is one of the most valuable retirement benefits you can have. It offers a guaranteed income, often with inflation protection and survivor benefits, and involves no investment decisions or risk on your part.

If you’re lucky enough to have one, it’s worth understanding how it works — and thinking carefully before making any decisions, especially around transfers. For most people, holding onto a final salary pension is the safest way to ensure long-term financial security in retirement.