How safe is my pension?
Whenever something major happens with the economy, especially if it causes financial turmoil (like the UK’s mini-budget in September 2022), a question you might be asking yourself is “how safe is my pension?”
Overall, pensions are safe as they’re often covered by the Financial Services Compensation Scheme (FSCS) and the Pension Protection Fund.
There are two types of workplace pensions – Defined Benefit and Defined Contribution – and then there’s the State Pension. You can also have a private personal pension, like a SIPP, a self-invested personal pension. Personal pensions are like a supplement to your workplace and State pensions.
Is my Defined Benefit Pension Scheme safe?
In this kind of pension scheme, your employer has agreed to make sure there are enough funds for the pension scheme to pay you the benefits you’ve been promised.
If something happens to your employer (if they go bankrupt for example) and the scheme doesn’t have enough money to pay your benefits in full, then the Pension Protection Fund will step in to protect your benefits and cover the costs.
The Pension Protection Fund usually pays 100% compensation if you’ve reached the scheme’s pension age, and 90% compensation if you’re below the scheme’s pension age.
There are different rules for public sector schemes, where the Government usually makes sure the scheme has sufficient funds to pay your benefits when you retire.
Is my Defined Contribution pension safe?
Most employers use a pension provider to hold your pension benefits. This means if your employer goes out of business, you won’t lose your benefits.
Pension providers should be registered with the Financial Conduct Authority (FCA). This means your benefits are protected if the pension provider goes bankrupt.
If it’s unable to pay your benefits in full, you can get compensation of up to £85,000 from the Financial Services Compensation Scheme (FSCS).
Some employers set up their workplace pension under a Trust. If your employer goes bust, the scheme may use some of your money to run it. Your benefits will remain secure though.
One key thing to remember is that the value of your investments can fall or increase in value. And each person bears the risks of this happening to their investments. So any compensation that’s paid out won’t cover investment losses, it’ll just cover the amount of money that was in your pension. So let’s say for example, you put £10,000 into your pension fund. But the investments hadn’t performed well so the total amount in there was £9,000 when the pension provider went out of business. In this case, you’d get £9,000 back, which is the value of your pension fund, not the £10,000 you put in.
What about my State Pension?
The State Pension is money you get from the government when you reach the State Pension age. The State Pension age is currently 66, but it’ll increase to 67 by the end of 2028. There may be additional increases after this as the UK population ages.
You’ll need 10 years of National Insurance contributions to get the minimum State Pension, and 35 years of National Insurance contributions to get the full State Pension.
What about pension scams?
One last thing to add is on pension scams.
Scammers are going to scam, and there are a LOT of scams out there. They often try to get you to transfer your pensions somewhere else. And they’ll usually approach you with amazing promises of guaranteed returns.
Before transferring your money anywhere, take a step back and do some research. Legit pension providers won’t be sending you messages or emails out of the blue asking you to move your money over.
Be sure to check the FCA website for guidance on avoiding scams. It’s a great resource that can help you stay informed and up to date so that you can protect your very important pension savings.