Is my pension safe?

16 September 2024

Written by Ali-Akber Clark

After years of saving and planning for a comfortable retirement, ensuring the safety of your hard-earned pension is naturally of great importance. This article will explain the various protections in place.

Whether you have a defined benefit pension, a defined contribution pension, an annuity or other retirement savings, protection is in place to safeguard your money. By understanding this protection and taking proactive steps to benefit from it, you can ensure your pension remains secure.

Understanding pension types

First, let's clarify the two main types of pensions:

• Defined benefit (DB) pensions. These pensions usually provide a guaranteed income for life, based on your salary and years of service. They are common in public sector jobs and older workplace schemes. The amount you receive is predetermined, making DB pensions highly valued.

• Defined contribution (DC) pensions. These pensions accumulate contributions from you and (often) your employer, which are then invested. The final amount you get to turn into income depends on the contributions made and how well the investments perform. DC pensions have become more common recently as companies are tending to phase out their DB schemes.

How are defined benefit pensions protected?

If you have a DB pension, your main safety net is the Pension Protection Fund (PPF). The PPF was created to protect members of DB pension schemes if their employer becomes insolvent and the pension scheme doesn't have enough money to pay out the promised benefits.

It means that if a company you work for, or have worked for, goes bust then the PPF will either find another provider or insurer to take over your pension scheme, or pay your pension themselves via compensation payments.

Here’s how the PPF helps to protect your pension income:

• If your scheme is transferred to the PPF when you've already reached your scheme’s normal retirement age or retired early due to ill health, you will generally still receive 100% of your promised pension. The same goes for those receiving a survivor’s pension, such as a widows/widowers pension. 

• If you're below the normal retirement age, you will typically receive 90% of your accrued pension, subject to a cap. 

• When your compensation payments start, you can normally choose to take up to 25% as a tax-free lump sum.

• Your compensation payments will increase each year up to a maximum of 2.5% (for pensions built up since 6 April 1997), which may be lower than what the original scheme promised.

There are further protections in place for DB schemes by the Pension Regulator and the Financial Services Compensation Scheme, which we explore further on.

How are defined contribution pensions protected?

DC pensions don’t come with the same guarantees as DB pensions, but there are still substantial protections in place. Crucially, the Financial Conduct Authority (FCA) has a prominent role in safeguarding your DC pension.

The FCA authorises and regulates personal pensions and group personal pensions set up within your workplace. These include annuities, self-invested personal pensions (SIPPs), stakeholder pensions and Additional Voluntary Contributions (AVCs).

The FCA enforces rules to ensure that the firms providing these pensions operate fairly. The FCA also requires firms are financially stable and capable of meeting their obligations to pension savers.

In addition, the FCA has strict rules to prevent the mis-selling of pension products. This means that firms must not make false or misleading claims about the potential returns or benefits of a pension scheme. If necessary it will use formal powers to gain redress for those who have been treated unfairly.

There are further protections in place for DC schemes by the Pension Regulator and the Financial Services Compensation Scheme (overseen by the FCA), which we explore below.

How are annuities protected?

Consumers who have purchased an annuity provided by UK-regulated insurers typically have the reassurance of protection should their annuity provider go out of business. This protection is provided by the Financial Services Compensation Scheme (see below).

Please see our guide ‘How are annuities regulated?’ for more information about the protection provided to annuity customers.

The Pensions Regulator (TPR)

The Pensions Regulator is the UK regulator of workplace pension schemes. It works to ensure that schemes are well-managed and acting in the best interests of members. Its specific duties include protecting people’s savings in workplace pensions and reducing the risk of pension schemes ending up in the Pension Protection Fund.

It is also responsible for ensuring that employers follow automatic enrolment requirements and contribute to their employees' pensions. For those in a DB scheme, the TRP says that it also “ensures employers balance the needs of their pension scheme with growing their business”.

The Financial Services Compensation Scheme (FSCS)

The FSCS is another layer of protection for pension savers, covering both DB and DC pensions in specific situations. If your pension provider or investment firm fails, the FSCS can compensate you, subject to certain limits and conditions.

For example, if your pension scheme fails, the FSCS can typically compensate you up to £85,000 per institution that your money is invested with. However, some types of investments or schemes might not be covered by the FSCS and others might not have the same level of protection, so it’s important to check with your provider. 

For example, annuities are covered by the FSCS, but Occupational Pension Schemes (OPS) are not covered if they fail, although they may be protected by the Pension Protection Fund (PPF).

Practical steps to protect your pension

Understanding the safeguards in place is a great first step, but there are also practical steps you can take to further protect your pension fund.

Regularly review your pension

Check your annual pension statements to ensure your details and contributions are correct. Monitor the performance of your pension investments and consider rebalancing your portfolio if needed. For DB pensions, stay informed about the financial health of your scheme and the sponsoring employer.

Trace lost pensions

Over the course of a career, it’s easy to lose track of pensions from previous employers, especially if you've changed jobs multiple times or moved homes. These forgotten pensions can form a significant part of your retirement income, so it’s important to locate them and consolidate your savings. 

The UK government offers a free Pension Tracing Service, which helps you find contact details for your pension schemes. You can use the service online or by phone to search for any pensions you might have forgotten. By diligently tracking down and keeping tabs on all your pension pots, you ensure that all your retirement savings are accounted for and accessible when you come to need them.

Seek professional guidance or advice

Take advantage of free guidance for over-50s from Pension Wise, a government-backed service offering impartial advice on your DC pension options. You may also wish to consult a regulated financial adviser for tailored advice on your pension and retirement planning.

Stay informed

Keep up-to-date with changes in pension regulations and protections by following news from the FCA, TPR and PPF. Be vigilant about pension scams and report any suspicious activity to Action Fraud on 0300 123 2040 or report it on the Action Fraud website. 

Is my pension fund safe from investment fluctuations?

Another concern among people approaching retirement with DC pensions is how safe their pension funds are from investment fluctuations. The value of your pension savings can be affected by movements in the financial markets due to a variety of factors, including changes in economic conditions, interest rates, corporate performance and global events. 

While investments can grow significantly over time, they can also lose value, particularly in the short term. Unlike DB pensions, which promise a guaranteed income level, the income you eventually get from a DC pension largely depends on investment performance.

There are some strategies you can employ to mitigate investment risk and regularly reviewing your pension investments and making adjustments as needed can help to maintain your desired level of risk, and let you respond to changing market conditions. You may of course wish to ask a regulated financial adviser for assistance.