Final Salary Schemes

Final salary schemes are also known as Defined Benefit Arrangements (see Registered Pension Schemes).

Final salary schemes provided a guaranteed proportion of final salary at retirement (or on death). Members of final salary schemes before 6 April 2006 are unlikely to have seen considerable changes to their schemes since this date.

The following final salary scheme rules, which were in force prior to 6 April 2006, no longer apply:

• A final salary scheme had to have a defined normal retirement age, which could be no earlier than age 60.
• Members had to retire from their employment in order to take their scheme benefits.
• Her Majesty’s Revenue and Customs (HMRC) maximum benefits limits could not be exceeded by pension benefits provided by the scheme.
• Tax-free cash provided by the scheme was also limited to HMRC maxima.
• The maximum lump sum benefit on death before retirement was four times remuneration.
• Benefits paid to a spouse or dependents on death were also subject to HMRC rules.
• Contributions and benefits of post-89 members were subject to the earnings cap, which, in the tax year 2006/7, was £105,600. A post-89 member is a member who joined an occupational pension scheme after 31 May 1989, or anyone who joined a occupational pension scheme which had been set up after 13 March 1989.
• The maximum employee contribution was 15% of remuneration.
• Tax relief on employees’ contributions was provided via the net pay method.

For more information, please contact us.