Final salary pension calculator
You can find basic online calculators to work out how much your annual pension entitlement would be at retirement based on knowing your final salary before tax (gross salary) is paid into the scheme. You also need to know how many years’ service you did plus the scheme accrual rate which is commonly expressed as a fraction such as 1/60 or 1/80.
Some organisations have several schemes (e.g., Scheme A, Scheme B etc) and they may have different accrual rates and different Normal Retirement Ages (e.g., age 55, age 60, age 65, age 67). Hence an employer could have one scheme with higher benefits than another scheme they run.
It may be that your employer switched you out of their Final Salary Scheme (aka defined benefit pension scheme) because they could not afford to keep it going along the same lines and, as an alternative, they had to start a defined contribution pension scheme for their employees. In this case, your final salary used for the calculation of benefits is likely the final one used to contribute to the Final Salary Scheme however, there may still be some salary-link increasing entitlement as your salary increased.
If you are at least 55 years of age you may want to ask them for an Early Retirement Quote (ERQ) if you are considering retiring early. If you are in ill-health before retirement age, it might be worth talking with your scheme to see how they can help you take benefits early.
As an example, if your final salary counted for the scheme was £30,000 and you have 10 years of service contributing to that scheme with a scheme accrual rate of 1/60 then you can expect an annual income (pension) of £5,000 (guaranteed income). Using the same salary and accrual but 20 years of service, the annual pension would be £10,000 income for life.
The Cash Equivalent Transfer Value (CETV) is not a simple calculation based on the annual pension entitlement but instead, it is a Final Salary Pension Scheme specific offer. It is a transferrable cash offer that has a guaranteed value for a limited time. This is the offer that your scheme makes if you agree to give up your guaranteed Defined Benefits.
The amount of lump sum payable is specific to the Final Salary Pension Scheme so you would need to know the specific formula they use to calculate this. This information is often made available in the member’s Final Salary Pension Scheme handbook.
Transferring a DB pension CETV to a defined contribution pension pot means giving up a guaranteed income for life in favour of being able to flexibility access your pension fund but as the Financial Conduct Authority point out: This is unlikely to be suitable for most people. The main reason for this stance is that giving up guaranteed income might backfire on you if you run out of money.
The state pension is one form of guaranteed income that provides a good buffer for most people to meet essential expenditure if paid out at the full amount (currently requires 35 years of full National Insurance credits) However, we are sure most people would like more than the amount the full state pension pays out to have an enjoyable retirement. As such, cashing in Final Salary Benefits without fully appreciating all in entails could be a serious error.
The subject of pension income is part of a broader financial planning area called Retirement Planning. Financial Planners will look at strategies for building up a retirement nest egg that meets your needs in retirement. This can include more than just pensions but it always looks at the most tax-efficient way to accumulate funds and spend them too!