Defined Benefit/final Salary Schemes
Traditionally, a large number of UK employers offered their employees access to a defined benefit occupational pension scheme, often based on final salary. In such an arrangement, the employee was typically promised a pension of a fixed proportion of their salary in the period leading up to retirement. The proportion would depend on the number of years of service with the employer. Post retirement increases are typically partly discretionary. The amounts payable are restricted by taxation rules, the maximum being typically either a pension of one-sixtieth of final salary for each year of membership or a pension of one-eightieth of their salary per year of membership plus a tax free lump sum of three-eightieths. With increases in longevity and reductions in interest rates, such arrangements were becoming progressively unaffordable. So following a review by a Pensions Commission, to get a given income, the length it is necessary to pay into a pension in the public sector is linked to longevity.
Read more about this topic: Pensions In The United Kingdom, Occupational Pensions
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