What is an accrual rate? Active Members
This Quicknote is written for people who are active members of a defined benefit scheme. It forms part of our Module Important Aspects of My Pension and should be read alongside the other Factsheets and Quicknotes in the series.
Most defined benefit schemes provide benefits based upon 4 key elements:
- the length of the pensionable service you are credited with as being an active member of the scheme
- your pensionable salary
- the formula or rate of ‘accrual’ which uses service and salary to work out your pension
- the circumstances under which benefits are taken from the scheme (retirement, early payment, early leaver, ill-health, death etc).
Your pension scheme will use a formula, to calculate your pension benefits using these elements. The formula (and the definitions for each part of it) will be set out in the Scheme Rules.
An accrual rate is an important part of this formula. It is the rate at which you build up pension benefits whilst a member of your employer’s defined benefit scheme. It is most commonly expressed as a fraction, such as 1/30th, 1/60th, 1/80th, 1/120th etc. The lower the bottom number, the better the pension benefit you will receive for an equivalent amount of pensionable service e.g.
Example 1, using a 1/60th ‘accrual rate’
Pensionable Service, 20 years
Final Pensionable Salary, £30,000
‘Accrual rate’, 1/60th
Pension: 20 years x £30,000
60
= £10,000 p.a.
Example 2: using a 1/80th ‘accrual rate’
Pensionable Service, 20 years
Final Pensionable Salary, £30,000
‘Accrual rate’, 1/80th
Pension: 20 years x £30,000
80
= £7,500 p.a.
An accrual rate will usually be part of the formula used in a final salary scheme or a career average revalue earnings scheme (both are types of defined benefit scheme).
An accrual rate can sometimes be expressed as a percentage e.g., 1.25% (which is simply another way of saying 1/80th in this example). So, in a final salary scheme for example, you may accrue 1.25% of your final pensionable salary for each year of pensionable service.
Summary
People seldom have identical pensions and you should avoid drawing comparisons with colleagues whose circumstances may at first appear the same but could emerge as having significant differences.
This is not an authoritative document. Seek professional advice from an appropriately experienced and qualified adviser.
What is an accrual rate v3.0 Active
Last updated 17/01/2007
