Updated 14 May 2021
Your pension is a precious nest egg that enables you to look forward to a comfortable retirement. However, it’s hard to ignore media headlines about pension scams, pension fraud, falling stock markets and insolvent employers causing problems for their employee’s pension funds. So how safe is your pension and should you be worried?
It’s a question that everyone who’s worked hard to save for their post-work years wants a straight answer to. Yet, like pretty much everything relating to pensions, there is a lot to understand. Despite the attention-grabbing headlines, the good news is there are robust industry safeguards in place to protect the majority of pensions.
Typically up to £85,000 per person per institution is fully protected if your bank goes bust. This protection's provided by the UK's Financial Services Compensation Scheme (FSCS). This £85,000 limit also covers pensions and investments. So, depending on how much you’ve got in your pension fund and what type of pension scheme you have, you can be reassured that a sizeable sum will, in most cases, be protected.
The global impact of the coronavirus saw stock markets plummet temporarily, and in the short-term things are likely to remain volatile. The main thing is to avoid making any rushed decisions. Remember that pensions are long-term investments and, although not guaranteed, values generally rise over time. If you’re not planning to draw on your pension for several years, it’s probably best to sit tight and let your pension pot recover from the recent fluctuations in the stock market.
The impact on your pension if your employer goes bust depends on what type of pension scheme you have.
Most workplace pension schemes are defined contribution pensions and are usually run by pension providers, not employers. This means, if your employer goes bust, you won’t lose your pension pot.
Some defined contribution schemes are run by a trust appointed by the employer and are known as ‘trust-based schemes’. If your employer goes out of business, you’ll still get your pension – but you might not get as much as you thought. This is because the scheme’s running costs will be paid by the members’ pension pots instead of the employer.
If you've got a defined benefit (final salary) pension in the private sector and your employer goes bust, this may have knock-on implications for its pension fund. The Pension Protection Fund (PPF) was set up to pay the pensions of any members whose pensions might be impacted in this way. Payments are usually as follows:
In other words, you shouldn’t have much to worry about even if your pension scheme does collapse – provided the government keeps the PPF sufficiently funded.
If you have a public sector pension that is centrally funded by the taxpayer, then the scheme cannot go bust as payments are met from government spending.
If the pension provider was authorised by the Financial Conduct Authority (FCA) and cannot pay you, you’ll be able to get compensation via the Financial Services Compensation Scheme (FSCS).
If your pension provider goes out of business, the FSCS will first try a pension transfer to move your funds to another pensions company. If that's not possible, you’re entitled to get back 90% of whatever you have saved in your pension.
If you have a pension (or you were advised to get a pension) and the provider or adviser has gone out of business, you may be able to claim compensation via FSCS. However, the amount of compensation you could get depends on the type of pension product you have.
With savings accounts – such as a personal pension – FSCS protects up to £85,000 per person per institution. Be aware that FSCS does not generally cover performance losses – for example, if the shares you invest in go bust, but it can cover poor investment management. The FSCS safety net applies if you lose money due to the pension or investment firm going bust.
If you have a stakeholder pension, this should be covered by the FSCS’s long-term insurance. This covers 90% of the pension’s value. But if you have a SIPP and the money is held as cash, then this gets the same coverage as cash savings (£85,000 per person per institution).
If you’ve been given dubious pension advice or mis-sold to by an Independent Financial Adviser (IFA) or broker, you could be eligible to claim compensation – again via the FSCS – up to the standard £85,000 per eligible person, per firm, provided your pension provider is authorised and regulated by the Financial Conduct Authority (FCA).
There’s no doubt that your pension, as with anything of value, can become the target for illegal activities and scams, which can take many forms and may even appear to be a legitimate investment opportunity. That’s why it pays to be on your guard against pension fraud. The Pensions Advisory Service has four simple steps you can take to protect yourself:
If, due to fraud or theft, there’s a shortfall in your company’s pension fund, you may be eligible for compensation from the FSCS. For guidance, or if you want to make a complaint about the way your workplace pension scheme is run, contact the Pensions Advisory Service or the Pensions Ombudsman.
Making decisions about your pension can have long-term consequences and impact on what kind of a retirement you can expect. Before making any major decisions about something as complex and valuable as your pension, it’s important to get guidance from an experienced financial adviser who understands the intricacies of pension schemes and products. They will look at your personal circumstances and goals, and assess how you feel about taking risks with your money. This will clarify what options are available to help you make informed decisions.
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