If you’re a member of a defined benefit or Final Salary 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 currently protects 90% of the value of members pensions (caps apply) and rises in line with inflation each year.
If you’ve been paying into a Final Salary 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 Final Salary pensions. It is a statutory fund in the United Kingdom, set up to protect members if their pension fund becomes insolvent. Which 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 be absorbed by the PPF and they will pay your pension.
The Pension Protection Fund (PPF) currently protects 90% of the value of members pensions, subject to capped amounts but only around 0.5% of members are affected by these.
Payouts also rise in line with inflation each year, subject to a cap.
How much is the current compensation cap for PPF members?
If you’ve already reached your scheme’s normal pension age then you’ll continue to receive 100% of your pension without a cap.
From the 1 April 2020, the cap at age 65 has been set at £41,461 a year (in October 2020 the pension age changed to 66) Pension Protection Fund members will receive 90% of this. This amount will increase in line with inflation every year (subject to government limits). The majority of scheme members (99.5%) are not affected by this cap.
Can I defer my pension?
Yes, you can defer taking your pension from the PPF up until the age of 75 and your annual cap will be increased for every year that you defer. 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.
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, your pension will be paid directly into your bank account.
Will my partner still get a pension when I die?
Most Final Salary 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.
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 Advice, you can visit The Pensions Advisory Service 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.