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I have been reading how defined-benefit pension schemes work. My understanding is basically that you agree with your employer a life pension you will receive when you retire, which is calculated as some function of your last pensionable salary. Still, I have a few questions:

  • I'm assuming that you will need to sacrifice part of your salary to get into this kind of scheme, right?
  • What happens if your employer goes bankrupt?
  • The money you receive when you retire is taxable, correct?
  • What is exactly the pensionable salary?
  • I would like to see a more or less real example of this kind of schema to be able to have an idea about how this works compared to investing (in terms of returns). I have found several on the internet but none of them include how much salary does the employee sacrifice yearly.
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Defined benefit schemes only really exist in the public sector these days. Changes in the taxation system and increased scrutiny about the solidity and funding of these schemes in the private sector has resulted in almost all private sector companies in the UK shutting their schemes and replacing them with defined contribution schemes.

  • I'm assuming that you will need to sacrifice part of your salary to get into this kind of scheme, right?

Most schemes work or worked that way. A minority didn't, for example Judges appointed prior to 31 March 1995 may belong to an unfunded final salary pension scheme.

Salaried Judges appointed prior to 31 March 1995 usually participate in a scheme established under the Judicial Pensions Act 1981 (JPA 1981). JPA 1981 members have the right to elect to transfer to the 1993 Scheme (see below) at any time up to six-months after retirement.

JPA 1981 is an unfunded, final salary occupational pension scheme, which is not registered for tax purposes.

  • What happens if your employer goes bankrupt?

There's a pensions protection scheme that pensions contribute to. Your pension may be reduced if you're forced to rely on the scheme, but you will get something. This was created as a result of the Mirror group bankruptcy. Of course if you work for the government, it can't really go bankrupt and this scheme doesn't apply.

  • The money you receive when you retire is taxable, correct?

Correct. You are likely to pay a lower rate of tax though as your pension is unlikely to be as much as your salary was.

  • What is exactly the pensionable salary?

The amount of your salary that counts towards your pension e.g. if you're paid an annual bonus that might not be pensionable salary and when the company calculates it's contribution as a percentage of your salary, the bonus might not count. Car allowances typically don't count either for example.

For example let's say you are paid £100,000 and get a bonus of £20,000 with a car allowance of £3000. If neither the bonus, nor the car allowance are pensionable salary and the company contribution is 10%, it will pay £10,000 into your pension. If your contribution is 5% then you'd pay in £5,000. These are example figures chosen to make calculation easy and are not from any real scheme.

I would like to see a more or less real example of this kind of schema to be able to have an idea about how this works compared to investing (in terms of returns). I have found several on the internet but none of them include how much salary does the employee sacrifice yearly.

These schemes really exist only in the public sector nowadays so you'd need to work for the government e.g. NHS, judiciary, police, fire service, local or central government. You can find details of civil service pensions here. These days government final salary pension schemes are contributory and pay out a fraction of your career average earnings for every year that you worked.

The civil service scheme works by increasing the amount an employee is entitled to by one eightieth of their salary for every year worked, from which the worker can claim an annuity at a set rate. The Financial Services Authority suggests that this annuity rate would be around 2.9 per cent.

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