FINAL SALARY SCHEME

These are increasingly rare pension schemes (unless you are a government employee) where an employer guarantees to link your pension to your final salary whilst you were in employment.

The reason they are rare is that this puts all the risk onto an employer in terms of whether they will have the funds available to meet this commitment. A more common form of pension these days is defined contribution, or money purchase. Here an employer and an employee each may contribute to a pension fund the value of which is not fully known until the employee retires. As such the risk is borne by the employee in terms of what this fund will pay for on retirement.