Welcome to this week's Finance Fridays. Last week we were looking at the return of the 100% mortgage. For this week we are talking about something else that has been in the news recently – the problems with company pension schemes when the main company goes bust. The collapse of BHS has shown that the Bhs Pension Scheme had a deficit of over £500m. I spent many years working in occupational pensions and the first company I worked for had the contract for what was left of Robert Maxwell's pension plans after he mysteriously fell off his yacht in 1991. Since then protection has been put in place so those who have been paying into company pension schemes don't lose all their entitlement if the main business goes bust.
In April 2005 the Pension Protection Fund (PPF) was set up replacing the The Pensions Compensation Board. The idea of the PPF is that if you pay into a company defined benefit scheme (also known as a final salary scheme) and the parent company collaspes the members will not lose all of their retirement savings.
How do I know what type of scheme I am in? - If your retirement pension is calculated using your years of service and your salary when you retire then you are in a defined benefit scheme. Most public section pension schemes are defined benefit schemes but they are financed differently to private section schemes and therefore are usually exempt from the PPF.
If your monthly pension contributions are invested by another financial company which is then used to buy an annuity or withdraw at retirement you are in a defined contribution scheme (also known as a money purchase scheme). As the funds are held by another company the amount of money you have in that fund should not be affected by your company going bust. These schemes are therefore exempt from the PPF too.
How is the PPF funded? - The PPF is funded by a levy on all eligible pension schemes. This is then invested along with any money recovered from the pension schemes they take on. At the last published accounts the PPF had £3.6 billion in reserves and over £23 billion of assets under management.
How many schemes are looking after by the PPF? - Since it was set up over 800 pension schemes have been transferred to the PPF. Some of these are small companies while others are large well-known companies such as Woolworths, Royal Doulton and the now defunct DIY shops Focus and Do It All.
How much money will I receive from the PPF? - If you retired at the scheme's normal retirement age you will generally receive 100% of your pension amount. This should also include people who have retired early on ill-health grounds and those in receipt of spouse's and children's pensions.
If you took early retirement and had not reached the normal retirment age when the company went bust then you will generally received 90% of the pension you were receiving at the time the company failed. This is also subject to an annual cap. From 1st April 2016 this stands at £37,420.42 at age 65, which equates to £33,678.38 when the 90% cap is applied. There is a sliding scale so the younger you are the lower the cap is.
For those who have not received their pensions yet they will receive up to 90% based on the cap explained above once you do retire. In the meantime your accured pension will increase each year in line with inflation.
Once you die any children's or spouse's/partner's pensions will generally be paid out in line according to the former scheme's rules. Therefore if the rules said your legal spouse would be entitled to 50% of your pension on your death then this is what they should receive from the PPF.
Do you pay into a company pension scheme? Are you worried about the safety of your retirement funds?
We were joined last week by Jane of Maflingo who has been sharing her tips on saving money when dealing with eyecare from getting free eye tests to great deals on glasses and contact lenses.
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