Defined benefit (final salary) scheme
The procedure here is much more complex and is best explained by way of an example
Husband (H) is an active contributing member of a Final Salary scheme
Current annual rate of pay is £30,000 at 1 Jan 2014
Normal retirement age is 60, H is age 50 now
Accrual rate for pension benefits is 1/60 x final pay for each year of service
Service in scheme at 1 Jan 2014= 20 years.
Hence H’s accrued pension at age 60 = 1/60 x 20 x 30,000 = £10,000 p.a.
40% pension share at 1 Jan 2014.
Pension debit deduction applied to H’s pension from his Normal Retirement Age (age 60) is £10,000 x 40% = £4,000 p.a.
If we now move forwards in time by 10 years, to 1 Jan 2024, H’s Normal Retirement Date (age 60), assuming that he was still a contributing member of the scheme at that time, his position a that time might be as follows:
Final annual rate of pay is £60,000 at 1 Jan 2024.
Service in scheme at 1 Jan 2024 = 30 years.
Pension accrual rate is unchanged.
Hence H’s accrued pension at age 60 ignoring any debit = 1/60 x 30 x 60,000 = £30,000 p.a.
Pension debit at age 60 was £4,000 p.a. at 1 Jan 2014 Debit is revalued in accordance with scheme rules, (typically in line with inflation) and increases to £6,000 p.a. by 1 Jan 2024
Hence final pension to H at age 60 after applying the debit = £30,000 less £6,000 = £24,000 p.a.