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What is the Pension Protection Fund?


    If you’re a member of a defined benefit pension scheme, you might be worried about what happens to your pension if your scheme or employer goes bust. The good news is that in the vast majority of cases your pension will be protected by the Pension Protection Fund.

    The Pension Protection Fund (PPF) is a statutory fund intended to protect UK Defined Benefit pension members if their pension fund becomes insolvent. It protects the value of members’ pensions and rises in line with inflation each year.

    If you’ve been paying into a Defined Benefit pension and are concerned over the future of your guaranteed benefits read on. You might be relieved to know that your money is largely protected.

    What exactly is the Pension Protection Fund and what does it do?

    In recent years there have been a series of high-profile business collapses like BHS and construction giant Carillion. More often than not these businesses leave behind defined benefit pension schemes in deficit.

    The Pension Protection Fund (PPF) was created to protect the people in those defunct schemes with Defined Benefit pensions.  It is a statutory fund in the United Kingdom,  set up to protect members if their pension fund becomes insolvent. This means that, if you have a Defined Benefit pension and your employer or pension scheme goes bust, your Pension doesn’t completely disappear with them.

    If your employer or pension scheme goes bust, Your pension scheme will normally be absorbed by the PPF and they will pay your pension.

    The Pension Protection Fund (PPF) currently protects the full value of pensions for members who have already reached the schemes retirement age and 90% of the pensions for members who have not yet reached the scheme’s retirement age.

    The fund previously capped the level of compensation payable but following a 2021 court ruling the statutory limit on the amount of compensation that is paid no longer applies.

    Pension payouts for PPF members rise in line with inflation each year, subject to a maximum of 2.5%.

    How much is the current compensation cap for PPF members?

    Since a court ruling in July 2021, there is no longer a cap on the value of compensation that is paid to members whose pension scheme enters the PPF.

    If you’ve already reached your scheme’s normal pension age and are taking your pension then you’ll continue to receive 100% of your pension without a cap.

    If you’ve retired early or have not yet reached your scheme’s retirement age the PPF will pay you 90% of the value of your pension.

    Can I defer my pension if it’s in the PPF?

    Current rules allow members to defer taking their pension from the PPF up until the age of 75. If you opt to defer, your annual cap ( the maximum amount you can receive) will be increased for every year that you defer, meaning you could get more money per year by deferring.

    Obviously, you need to weigh the increase up against the cost of not receiving your pension in the years that you defer. It may only work in your favour if you outlive the life expectancy of an average scheme member.

    It’s worth seeking financial advice before opting to defer your pension to see if it’s really the right option for you.

    You can change your mind about deferring at any point and start taking your pension.

    The Pension Protection Fund and Early Retirement

    Individuals whose Pension is taken over by the Pension Protection Fund (PPF) can still retire earlybut the amount you’ll receive will be reduced for each year below your scheme’s normal retirement age. See here for full details of the Compensation Cap

    If your scheme had a protected retirement age lower than 55, you will retain the right to take early retirement as per your pension scheme rules if your pension scheme becomes part of the PPF.

    Can I still take a tax-free lump Sum if my Pension is with the Pension Protection Fund?

    Changes to Pension Freedoms allow those with a personal pension to access a 25% tax-free lump sum at 55. In most cases, you will still be eligible to access 25% of your pension as a tax-free lump sum even if your Pension is managed by the Pension Protection Fund (PPF). Although please be aware that your payments will be reduced accordingly to reflect this. For full details of how this would affect your Pension Payouts please visit the PPF members site.

    Simon garber looking at Pension protection fund website

    Will my Pension amount still rise every year?

    The amount your pension will go up by each year before you retire will be in line with inflation (up to government limits).  If you’re a deferred member then there are limits to the increase you’re entitled to depending on when you built up your pension fund.

    How will my Pension be Paid?

    If your pension scheme is absorbed by the PPF, your pension will still be paid, normally, directly into your bank account.

    Will my partner still get a pension when I die?

    Most Defined Benefit Pension Schemes offer a survivor’s pension on death. If your original pension scheme had a provision for a survivor’s pension then your Spouse or Civil Partner will still receive this in line with the PPF rules. If you are not married but live with a ‘common-law’ partner it’s important to check whether they will be entitled to a survivor’s pension – you may need to register them as a beneficiary.

    If your partner is already in receipt of a survivor’s pension when the scheme enters the PPF, they will continue to receive 100% of the benefits they are currently being paid. If your pension scheme enters the PPF before your partner receives a survivor’s pension, they’ll receive 90% of the stated benefits.

    Finding out More

    Visit their website to find out more about the Pension Protection Fund.

    Members can visit the member website for more information about their Pension and access to FAQs and more.

    Free Pension Advice

    If you’re looking for free Pension and retirement advice, you can visit the government’s Money Helper website for lots of helpful information or visit Pension Wise the government-run website to help you understand your options.

    Alternatively, if your Pension is not held by the Pension Protection Fund and you’d like to speak to a Pension Specialist, we offer a free initial 20-minute call to discuss your situation.

    Simon Garber

    Simon Garber

    Simon Garber, DIP PFS, runs 2020 Financial Ltd. He's an Independent Financial Adviser and Pension Transfer Specialist with over 20 years of experience. He's FCA registered, a member of the Personal Finance Society and holds the coveted Gold Standard for Defined Benefit Pension Transfer Advice.

    He is the Managing Director of 2020 Financial Ltd, Financial Advisors specialising in Retirement Planning & Wealth Management, based in Southampton, Hampshire.

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