How is the pension paid by a final salary scheme worked out?

A typical final salary scheme will pay a pension that depends on:

• how long you have worked for the company
• your salary when you leave the company
• something called the scheme's accrual rate.

The accrual rate is the proportion of your final salary you get for each year you are a member of the scheme. Accrual rates are usually expressed as fractions (1/60 is common) or sometimes as a percentage (which would make 1/60 the same as 1.67 per cent)

It's probably easier to see with an example.

Lucy retires with a salary of £30,000 after being a scheme member for twenty years. Her scheme has a 1/60 accrual rate. Her pension will be worked out this way.

For every year she worked she will get 1/60 of £30,000. This is £500 for each year. So for twenty years' service her first year's pension will be £10,000.

The accrual rate is an important part of how good a salary related scheme is. The commonest rate is porbably about 1/60th, although many schemes have cut accrual rates in recent years. Very good schemes will do better with 1/50th or even 1/40th.

Poorer schemes may go as low as 1/80th. Of course, more generous schemes will cost more, and employee contributions may be higher than in a poorer scheme.

Most schemes 'contract out' of the state second pension (formerly known as SERPS). This means that you will only build up rights to the basic State Retirement Pension while you are a member of a contracted out scheme. (See the contracting out section of workSMART.

A few schemes 'contract in'. This means that you will get a state second pension on top of your occupational scheme, but it does cost your employer more. In return the accrual rate may be smaller, so you should check whether schemes are contracted in or out before comparing their accrual rates.