You may have spent decades saving into your pension by the time you reach your fifties or sixties, so you’ll want to be sure that your money is safe for when it’s needed in retirement.
Periods of political and economic uncertainty can be especially disconcerting, particularly if they happen when you’re close to retiring. It’s therefore perfectly understandable that you may be feeling worried about the safety of your pension pot.
Here, we look at how secure different types of pension schemes are, and what happens if your employer becomes insolvent, or something happens to your pension provider. If you want to find out how other types of savings are protected, read our article Are my savings safe?
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
Should you worry about your pension?
Unexpected news can have a dramatic impact on financial markets and cause the value of pension savings to plummet. For example, the news of some defined benefit pension funds nearing collapse following the former Chancellor Kwasi Kwarteng’s disastrous mini-budget in September 2022 will have made many people nervous about how safe their retirement savings are during periods of financial turmoil. Funds with more than £1 trillion invested came under severe strain due a meltdown in government bond markets after his announcement, but were saved from going bust after the Bank of England promised to buy up to £65bn of government debt, calming volatility.
Exactly how your retirement savings are protected depends on the type of pension scheme you have and which provider you’re with, but rest assured that even in the worst case scenario, there are various independent protection schemes that can step in to secure your pension and retirement income. You can find out more about these below.
Defined contribution pension schemes
The most common type of pension scheme is a defined contribution pension, also known as a money-purchase pension scheme. The amount you receive from these depends on how much you have paid into it, your employer’s contributions, and how your pension investments have performed over time. Read more about how this type of pension works in our article What is a defined contribution pension?
Workplace defined contribution pension schemes
If you have a workplace defined contribution pension, your money is ring-fenced from your employer, so it shouldn’t be affected if the company you work for goes bust. The majority of these schemes are run by pension providers, and not by employers.
Some workplace defined contribution pension schemes are managed by a particular trust, so they are ‘trust-based schemes’. In this scenario, your pension is still safe, but you may not receive quite as much as you’d expected at retirement if your employer goes bust, because the cost of running the scheme will come out of members’ pensions rather than from the employer.
The Pensions Regulator (TPR) protects the UK’s workplace pensions. It works with trustees, employers, pension specialists and business advisers to give guidance on what’s expected of them, and ensures that schemes are run correctly. You can find out more about its role here.
Defined contribution personal pensions
If your personal pension provider goes bust, your money should be safe, as your money is not directly owned by the pension provider, so it cannot be taken by creditors. In most cases, your money will be held separately in specific investments that you’ve chosen (or your provider has chosen on your behalf), which provides further protection.
Modern personal pensions, such as self-invested personal pensions (SIPPs) held on an investment platform, are protected by the Financial Services Compensation Scheme (FSCS) up to £85,000 per firm. The FSCS steps in when financial firms fail and can’t pay their customers’ claims. You can read more about how it works in our article Are my savings safe?
However, Ian Millward, from Candid Financial Advice, says: “It’s the underlying legal structure that really protects you when it comes to a personal pension. The pension provider has to ring-fence your money from their own which means that any creditor has absolutely no legal claim on your money. You would face ‘interruption’ risk and considerable stress and uncertainty whilst you wait for a new pension provider/administrator to take over, but your money would be safe.”
“The only exception to this would be meeting the costs of going into administration. Costs can be considerable and if the failed firm has no money set aside for this then these costs can be claimed against client money. However, for anyone to actually lose money as a result of this then their individual share of those costs would need to exceed £85,000, and in practice it is hard to imagine any scenario where that could apply.”
Ultimately, though, it can be tricky to understand exactly what is and isn’t covered by different schemes. So, if you are concerned about whether your pension is protected, it is best to use the FSCS’ pension protection checker which can help you understand what protection you have.
Similarly, if a fund you’re invested in within your pension becomes insolvent, you’d receive up to £85,000 in compensation from the FSCS. Millward says: “Obviously the same is not true of unregulated funds and invariably where you read horror stories of lost pension assets it is because people have been persuaded to invest in these.” You can read more about pension scams and how to protect yourself in our article Don’t let scammers steal your retirement.
If you’ve taken professional financial advice regarding your pension, this adds a further layer of protection. If you received poor or negligent advice, you can claim compensation. The Financial Ombudsman Service (FOS) can award up to £375,000 in compensation for the loss this has caused, and if the adviser has failed, the FSCS will provide cover up to £85,000. That’s provided your pension provider is authorised and regulated by the Financial Conduct Authority (FCA).
The stock market and defined contribution pension schemes
You are not protected from the impact of stock market shocks, and falling share and other asset prices are likely to reduce the value of these pension pots.
Unfortunately you can’t prevent this happening, but the most important thing to do during periods of stock market turbulence is to try not to panic, as moving into cash only means you’ll no longer benefit from market recovery in the future, and that you’re turning paper losses into real ones. Find tips for managing difficult times such as stock market falls in our article Four ways to weather stock market storms.
Defined benefit pension schemes
A defined benefit, or final salary pension is considered the ‘gold-standard’ of pensions because it pays a guaranteed retirement income based on your salary and how long you’ve worked for your employer. Read more in our article What is a defined benefit pension? The employer must ensure that the scheme is able to pay out to its members in retirement, and if it’s not sufficiently funded, they may have to pay more into it.
As mentioned earlier, this type of pension made headlines in October 2022 when the Bank of England had to intervene to protect their assets following the government’s mini-budget. You can read more about this in our article Bank of England intervention: what it means for pension savers.
However, bear in mind that even during such a turbulent period and if the Bank of England hadn’t intervened, defined benefit pension savers still have some protection. You’re protected by the Pension Protection Fund (PPF) which will ensure the safety of your pension if your employer goes bust, and/or the scheme doesn’t have enough money in the pot to pay its members their promised retirement income, the PPF steps in to ensure they are paid. The amount you receive from the PPF depends on your age when your employer becomes insolvent.
How the Pension Protection Fund (PPF) works
The Pensions Protection Fund (PPF) guarantees your retirement income from a defined benefit pension scheme if your employer goes bust. It’ll pay the guaranteed income as promised if you’ve already reached pension age, or started receiving your pension early because of ill-health. If you’re receiving a ‘survivor’s pension’ – for example, if you’re a widow or widower – your pension is also fully protected.
If a company behind a defined benefit pension scheme becomes insolvent, the PPF will begin an assessment period to decide whether it needs to step in and meet members’ pension payments. In some cases, this may not be necessary if the scheme has enough money to pay its members’ pensions, even if the particular company has failed. The assessment period usually lasts from 18 months to two years, during which time trustees continue to manage the scheme on behalf of members. If the PPF does step in, you’ll receive 100% of your entitlement if you’ve reached pension age, but only 90% of the pension that you’ve built up before your employer goes bust if you’ve not yet reached your retirement age. Since July 2021 there has been no upper cap on this amount.
For example, employees of failed contribution firm Carillion had their pension schemes moved to the PPF. Around 4,000 members would have received just 55% of their pension payouts from the Carillion Rail Pension Scheme if the PPF hadn’t intervened. The PPF currently protects more than 5,200 defined benefit pension schemes following companies becoming insolvent.
What can you do to protect your pension?
As a first step, it’s important to understand how your particular pension scheme works, so you have peace of mind that your savings are protected. Get in touch with your workplace scheme administrator or your personal pension provider for more information.
However, it may be impossible to protect your pension from stock market falls in difficult times, as every investor will suffer these now and again. You could, though, check where your pension contributions are going, and that your investments aren’t too focused on a certain market or particular type of holding. Read our article 9 tips for maximising your pension in difficult times for more ways to potentially increase your retirement income, and protect your pension savings from turbulence.
If you’re paying into a workplace pension, you may be invested in a so-called ‘default fund’, which may not be the most suitable for you. These automatically shift the underlying investments in your pension to ‘safer’ investments such as bonds as you approach retirement age. If you have some way to go until retirement, or intend to remain invested in retirement, you may be comfortable taking more risk. Read our article Where is my pension invested? for more guidance on choosing the right investment options for you.
Where to get further help
If you’re worried about your pension and how safe your retirement savings are, or you’re not sure how best to get an income from your pension, there are plenty of places to get guidance or advice.
If you’re aged 50 or over, the Government’s Pension Wise service, run by the Pensions Advisory Service and Citizens Advice, provides free guidance on your pension choices at retirement.
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
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