It’s perfectly understandable that you may have concerns about how safe your pension plan is.
If you’ve paid into your pension for a long time the value can become quite significant. For many of our clients it is their second biggest asset after their home.
Pensions are often regarded with some suspicion – the rules seem complicated, the paperwork is confusing, and there are often negative stories about things not turning out well for policyholders.
The good news is that pensions are generally pretty safe investment vehicles, certainly in terms of the financial viability of the pension provider.
Investment Risk
If you have a defined contribution pension it is likely to be invested in one or more funds, some of which may invest in the stock market. Stock markets fluctuate over time, and therefore some of these investment funds can be high risk, so it’s a good idea to look in to how your pension is invested.
There isn’t any government protection for investment risk. If your pension fund drops in value - because the fund it is invested in has fallen - then you can’t claim any compensation (unless you were given bad advice by a bank, insurance company or financial adviser). The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested.
Institutional Risk
UK pensions are generally well protected against the risk of the pension provider or employer going bust.
The type and level of protection you have depends on the type of pension you hold.
Defined Benefit
Defined Benefit schemes (such as final salary or career-average schemes) provide a guaranteed level of income in retirement and are provided by companies for their employees. There are very few of these schemes still open to new members, but there are a great many schemes still in existence with ‘deferred’ benefits.
These types of scheme are protected by the Pension Protection Fund.
This pays compensation to scheme members if the employer becomes insolvent and the scheme doesn’t have enough funds to pay their benefits.
The compensation you receive may not be the full amount of pension you were expecting. The level of protection you receive depends on a number of factors, principally:
Whether you are already drawing benefits
Whether you are still contributing to the scheme
Whether you are a deferred member who has left the scheme but has built up an entitlement.
The levels of protection provided by The Pension Protection Fund can be found on their website (www.ppf.co.uk).
Defined Contribution
Defined Contribution pensions (such as a personal pension or group personal pension) are invested in a fund (or range of funds) chosen by the individual. If you haven’t made a decision about where to invest then you are likely to be in the pension provider’s ‘default fund’, which will be a mix of shares, bonds and other assets.
Most companies now provide Defined Contribution pensions to their employees.
This type of scheme isn’t covered by the Pension Protection Fund.
But, as long as the pension provider (usually an insurance company) is authorised by the Financial Conduct Authority, the savings within your pension are protected by the Financial Services Compensation Scheme (FSCS).
Provided that your pension is classed as a ‘contract of long-term insurance’ (which most are), the FSCS would pay 100% of the claim (i.e. 100% of what was in your pension when the provider went bust), with no upper limit.
It’s worth bearing in mind that the insurance companies who provide most workplace pensions are enormous organisations with large amounts of surplus capital. They are unlikely to go bust, but of course it is not impossible.
Some SIPPs
Some SIPPs may not be set up as ‘contracts of long-term insurance’. These pensions are also protected by the FSCS, but the protection available is £85,000 per individual, per firm.
If you invest in a SIPP I would recommend that you contact the SIPP provider or your financial adviser to check what protection applies.
Please note: This blog is for general information only and does not constitute advice. The information in this article is aimed at retail clients only.