In the past few months, we’ve seen the prosecution of Dominic Chappell
put BHS’ pension collapse back in the news and universities facing up to a ‘£17.5bn pensions squeeze
’. With these concerns putting the issue of pension security into the public spotlight, those of you approaching retirement age may be concerned about your own pension security. If you're thinking of taking your workplace pension sooner rather than later, then it's important that you take some time to understand how it's protected.
Luckily, we have mostly good news for you: your pension should be protected from underfunding or other associated issues by schemes which are in place to provide you with a pension income should your provider fail.
The nature of this protection will depend on the specific type of pension your company offers. It is likely to be either a defined benefit scheme (also known as a final salary scheme) or a defined contribution scheme (also known as money-purchase). Let’s take a look at each one individually…
Defined benefit schemes
These pension schemes involve receiving a specified pension payment, lump-sum or combination of the two, defined by factors such as salary, age and length of service.
One of the main concerns that often emerges regarding this type of pension is that it may be underfunded. This could happen if a company commits to giving sums to employees but then fails to make contributions to facilitate them.
This may sound alarming, however the existence of the Pension Protection Fund should help to relieve some of your concerns
. This is in place to provide compensation for employees in the event that the company becomes insolvent and has insufficient assets left within the pension fund to cover the compensation amount.
Do be aware that this compensation may not amount to 100% of the scheme’s value.
Defined contribution scheme
A defined contribution scheme is the other common workplace pension in the UK, and it involves both you and your employer making contributions which are then invested. Much of the risk involved comes from the fact that it is impossible to predict with certainty how well these investments will then perform.
These pensions are not covered by the Pension Protection Fund, but assuming the provider is authorised by the FCA (and you should make sure that they are), you will be covered by the Financial Services Compensation Scheme.
Retirement income, including pensions that are currently being drawn, are protected to 100% should anything happen to the provider. Should you choose to deposit your pension funds in a bank, building society or credit union, you will be protected up to £85,000.
So, how safe is your workplace pension? Well, despite the concerning press, there are measures in place to ensure that most of us will be protected even if our schemes don’t perform as expected.
Of course, this is no reason to stop keeping an eye on your pension: it’s always worth understanding how your pension is funded, and considering whether you want additional savings to help you through retirement.