How Safe is my Pension?
There’s nothing like a pensions scandal to get the journalists excited. Maxwell, Equitable Life, BHS. Not to mention “rip off” charges and dodgy property scams. No surprise then that many people turn their back on what could be the best investment of their life. And even those who recognise the value of pensions worry about what may happen to their money.
So how safe is your pension? A lot depends on the type of plan you have:
Defined Benefit (DB) Schemes (also known as Final Salary Schemes) offer benefits based on your period of pensionable service and your pensionable earnings. You don’t take any investment risk yourself but the pension scheme will have assets invested in property and shares, funded by contributions paid by you and your employer. If the investments fare badly your employer may need to increase contributions. If your employer goes bust the scheme may be left with insufficient assets to meet its liabilities, i.e. your pension!
To address public concern over the potential failure of DB Schemes the Pension Protection Fund (PPF) was created in 2005. It is a statutory fund, funded by levies on all eligible DB schemes. In simple terms it takes over responsibility for paying benefits if a DB scheme becomes insolvent. It safeguards 100% of benefits for those who have already reached the scheme retirement age (or retired early on ill-health grounds) and 90% of benefits for everyone else (subject to an upper cap, currently c. £37,500 per annum). Indexation of benefits may also be lower for schemes “rescued” by the PPF but this is still a hugely valuable safety net.
Defined Contributions (DC) Schemes (also known as Money Purchase Plans) come in many different guises: occupational schemes and AVCs, personal pension plans and free-standing AVCs, and don’t forget SIPPs. Protection for these schemes is provided by the Financial Services Compensation Scheme (FSCS). The compensation limit which applies to your pension will depend on the way your pension has been invested:
Deposits: if you choose to deposit your pension funds in a bank, building society or credit union you are protected up to £75,000 per person per firm.
Investments: If you choose to place your pension funds directly in investments (other than insurance products), you are protected up to £50,000 per person per firm. This limit will also apply if your claim involves the mis-selling of a pension. When you invest your money in an authorised fund domiciled in the UK, or Ireland your assets are kept separate from the fund provider. As a result, your investments are insulated from any financial difficulties that may arise within the fund provider. A separate institution called a depositary or a trustee safeguards your assets and looks out for your interests. They also oversee the fund provider and make sure your funds operate properly and in line with regulatory safeguards.
Retirement income: If you are already drawing a set retirement income from your pension pot from a life insurance contract, such as an annuity, your income is protected by FSCS to 100% if anything happens to your provider.
Pension Life Savings: If you are still building up your pension pot, 100% of your pot will be protected if it’s directly managed by a life insurance company.
So don’t be put off by the scare-mongers and the ill-informed! Your pensions are almost certainly safer than you may think.
To discuss further or to arrange a face to face meeting please contact us.