What can go wrong with your pension?
The greater the value of your pension fund, the more you’re likely to lose if something goes wrong. That’s because schemes designed to protect pensions limit how much they will pay out.
Timing is also critical as there are immoveable deadlines.
What can happen if you put off making a decision
Upon death your spouse will probably receive 50% of your pension, upon their death your children would receive nothing.
Once you enter the final 12 months before your scheme’s normal retirement age you can no longer transfer out of your pension without Trustee consent. You will receive your monthly pension payment and any agreed lump sum upon your retirement.
Upon your death your spouse will probably receive 50% of your pension until their death. Upon your spouse’s death your children (if you have any) will receive nothing. This of course assumes your scheme is not wound up during retirement!
Insolvency of employer
If the company behind your final salary scheme goes into administration before you reach retirement age it is too late to transfer out of the scheme.
Pension protection fund
When a company goes into administration or it is clear the pension fund will not be able to meet its liabilities the scheme enters an assessment period with the Pension Protection Fund (PPF). Upon completion of this assessment (which may take up to two years) the scheme may be adopted by the PPF if it meets all its entry criteria.
Members already in receipt of their pension will continue to receive payments. However, members who haven’t yet reached the scheme’s normal retirement age will almost certainly receive a reduced amount.
Plus, the PPF will pay no more than 90% of what you would have received and this is even capped at £37,314.96 (equal to 90% of £41,461.07 effective 1 April 2020) and less if you are under age 65. This is bad news if your expected pension is greater than £41,461.07 pa.
Scheme wound up
Company pensions can be wound up when the company goes out of business, is merged with another business or stops contributing to the scheme. If the scheme does not meet the criteria of the PPF you will have the option to transfer what is left of your pension to another pension provider. Sometimes insurance companies take over pension schemes that are wound up. The result to you – almost certainly a reduction in the value of your pension and without PPF protection this time it can be unlimited.
What About Public Sector and Low Risk Final Salary Schemes?
If you’re in a public sector scheme such as the Police, Teachers or NHS, or in a scheme you feel confident is secure, e.g. a bank, are you still at risk?
If we think you would be best off by remaining in your scheme we will tell you so.
It’s important to note that not all Final Salary Schemes are bad. There are still some very good ones around. If you come to us for your free review and we think that you would be best off by remaining in your scheme we will not hesitate to tell you so.
Whilst your scheme may have guaranteed benefits, you may want to retire earlier than the scheme allows or you may be concerned what your dependents will receive when you die. The risk may be negligable but there could still be a good case to consider your options.