Sir Fred Goodwin's £650,000 annual pension is based on his final salary when he left Royal Bank of Scotland last year.

This type of pension pays out a proportion of your final working income until you die, usually around 30 per cent every year. However, Sir Fred, who had a basic salary of £1.29 million and received a £2.86 million bonus in 2007, is drawing a pension that is 50 per cent of his basic pay.

As Sir Fred was only at RBS for nine years, his pension entitlement increased by about five per cent of his final salary for each year's service. All of this was paid for by RBS, as the scheme required no contributions from Sir Fred. Under most final salary schemes, employers only accrue about 1.25 per cent of employee's final salary for each year's service and employees are expected to make a contribution as well.

The big advantage of final-salary schemes is that they provide a guaranteed level of income that is not dependent on the performance of investments. Only 15 per cent of private sector workers are still in such a scheme – most are now closed due to high costs. RBS closed its final-salary pension scheme to new members in September 2006.

The normal retirement age for a member of a final-salary pension scheme, including that of RBS, is 60. But Sir Fred has started to draw his pension at the age of only 50.

Laith Khalaf, pensions analyst at Hargreaves Lansdown, said: “If a scheme member was allowed to start drawing their pension aged 50, they would usually expect to lose about half the value of their income. But it appears Sir Fred has struck a deal whereby he keeps the full value and is able to draw the pension early.”

In 2007, RBS’s Remuneration Committee reviewed the bank’s pension arrangements whereby a member – executive director or otherwise – does not receive a discount for retiring early. The committee decided to not to change this arrangement, declaring it “would not be a cost effective route to take at this time.”

The Government sets a cap on the maximum amount that high-earners can contribute to their pension per year and gain tax relief. The cap for this tax year is £235,000. Any contributions above this amount will be taxed at 40 per cent.

Sir Fred will also be paying 40 per cent tax on his £650,000 pension income, meaning he will take home about £33,000 every month.

Critics of Sir Fred point out that he would receive a mere £20,000 per year from his pension if RBS had been allowed to collapse. RBS has so far received more than £45 billion in public funds, which means the bank is 70-per cent owned by the taxpayer. Without such a bail-out, the bank would have collapsed, and all pensions would have been transferred to the Pension Protection Fund (PPF).

The PPF guarantees 100 per cent of final-salary pensions in payment, and 90 per cent of those yet to be paid, up to a maximum of £28,000 per year. As this amount gets lower if a member retires before 65, a member retiring at 50 would be able to receive a maximum of £21,952 per year.

Dr Ros Altmann, an independent policy adviser, said: “Sir Fred Goodwin should be treated like any other member of a pension scheme whose company has gone bust – he should be transferred to the PPF. There is absolutely no social justice or rationale behind taxpayers propping up banks to ensure that chief execs get paid such obscene pensions.”

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