After the risk of pensions collapsing made headlines, here’s how your retirement savings are protected

26/11/2024

Recently, you may have read headlines about how pension funds were close to collapsing. Naturally, you may be worried about your retirement savings and what protection is in place. Read on to find out. 

In September, former chancellor Kwasi Kwarteng delivered a mini-Budget that included aggressive tax cuts. It led to market volatility and the pound falling in value. While the government has since reversed many of the measures, you may have heard that the volatility it caused placed some pensions at risk.

The Bank of England (BoE) said that pension funds with more than £1 trillion invested in them came under severe strain, and several of them were in danger of collapsing following Kwarteng’s statement. Some funds would have been left with negative asset value and wouldn’t have been able to meet cash demands. 

The BoE stepped in with emergency intervention to calm the turmoil. It pledged to buy up to £65 billion of government debt to stabilise the markets. 

The steps taken by the BoE were effective, but the news that pension funds could collapse due to political and economic uncertainty can be a worry. However, there is protection in place.

The Pension Protection Fund protects defined benefit pensions

Much of the concern about pensions collapsing was about defined benefit (DB) pensions, also known as “final salary” pensions.

A DB pension is often considered the gold standard of pensions, as they will provide a reliable income for the rest of your life. The income provided is usually calculated based on your average salary and how long you’ve been a member of the scheme.

Many DB pensions also come with other benefits, such as providing an income for your partner or dependent children if you passed away. 

DB pensions are now less common as they represent a significant commitment from the pension scheme. As life expectancy rises, they’ve become more expensive to administer. However, they are valuable for retirees as they offer financial security and are often generous. 

If a DB pension scheme collapsed, the Pension Protection Fund (PPF) could protect your retirement income. 

According to the PPF, it protects millions of people who belong to a DB pension scheme in the UK and pays pension benefits to more than 260,000 people.

If your DB pension becomes insolvent and cannot provide you with the pension they promised, the PPF could provide compensation instead. 

If your pension scheme qualifies, the amount of pension compensation you’d receive would depend on if you’ve reached the scheme’s pension age or not.

• If you are under the pension age, you’d be entitled to 90% of the pension amount you had built up before the scheme became insolvent.
• If you are over the scheme’s pension age or start drawing your pension early due to ill health, you’ll receive the full pension.
• People receiving a survivor’s pension, such as widowers or children, will normally qualify for 100% of the pension income.

One important thing to note is that your income may not increase annually by as much as you expect through the PPF.

Many DB pensions provide an income that rises in line with inflation to preserve members’ spending power throughout retirement. However, increases in PPF compensation are capped at 2.5%, which could be significantly below expectations in a high inflation environment. 

You can find a full list of pension schemes that are covered by the PPF here: ppf.co.uk/schemes/index 

The Financial Services Compensation Scheme covers defined contribution pensions

Much of the turmoil reported in the news related to DB pensions, rather than defined contribution (DC) pensions. However, there are still protections in place for DC pensions that could give you peace of mind.

With a DC pension, you will make contributions, which benefit from tax relief, and are usually invested through a fund. In most cases, your employer will also need to make contributions on your behalf. When you retire, you will have a pot of money that you can use to create an income. 

If your DC pension scheme collapses, you will often be covered by the Financial Services Compensation Scheme (FSCS).  

• You can claim up to 100% of your pension, with no upper limit, if your pension provider fails. 
• If your self-invested personal pension (SIPP) operator fails, you can claim up to £85,000 per person, per firm.

Pensions are complex, and you can check how protected your pension is here: fscs.org.uk/check/pension-protection-checker 

The FSCS will not provide compensation if the investments held in your pension have not met your expectations or fall in value. So, it’s still important to understand your risk profile and choose a fund option that’s suitable for you. 

Contact us to talk about your pension

If you have questions about your pension, including how your savings are protected and what you can do to get the most out of them, please contact us. 

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results. 

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.