Pension Protection Fund
You may have read about the Government's Pension Protection Fund which was established to offer some protection to those members of a pension scheme where the Company becomes insolvent and the Company Pension Scheme has insufficient financial resources to meet its obligations to members.
Naturally we welcome any steps that provide increased security for members of pension schemes and helps to restore confidence in the Pensions system, but we do so with caution. It is often quoted in the press that 90% of Pension benefits will be protected when the amount is actually a maximum of 90% of benefits, it could be substantially less than this, in fact it has been estimated that it could be as little as 21% (Source: O&M Systems Professional Pensions 09.02.06).
The Pension Protection Fund is a lifeboat scheme to ensure that those relying on their employer's pension scheme to fund their retirement are not left to spend their later years in poverty and as such the PPF provides some valuable guarantees;
- Up to 90% of your Pension benefits (subject to a maximum limit) will be payable for life from the scheme's retirement age
- There will be up to 50% of your Pension payable to your partner if you die before them
- Your Pension benefits are not subject to the vagaries of the investment markets
- Some or all of your Pension benefits will be index linked to a maximum of 2.5% per annum
There are however certain constraints you should be aware of;
- Once a pension scheme begins the assessment period for entry to the PPF, which is usually considered the day the Company becomes insolvent, NO transfers are permitted out of the scheme unless they are on a PPF basis and this is only if they are not to the detriment of existing members so any transfers are extremely unlikely.
- In the vast majority of cases you will not be able to access your Pension benefits until the standard retirement age of the scheme.
- Any Life assurance lump sum benefits will cease
- The value of your Pension could be eroded by inflation as only post 1997 benefits will be revalued up to your retirement age to a maximum of 2.5%
- In retirement your Pension will only increase by a maximum of 2.5% per annum, if inflation is higher than this the spending power of your Pension will be eroded
- "In extreme circumstances compensation (your Pension) could be reduced" - This statement was taken from www.pensionprotectionfund.org.uk which provides a wealth of useful information and an informative FAQ section.
We hope that the Pension Protection Fund will not become an issue in your own case, however you should be aware that if your scheme enters the Pension Protection Fund you will no longer have the options available to you in respect of your Pension benefits and will be compelled to take your Pension in the format and at the time determined by your former employer. You need to consider your desire for flexibility and choice against your needs for financial security in retirement when taking into account factors in respect of the PPF and the long term solvency of your former employer and their Pension scheme.
If you would like to discuss the implications of the Pension Protection Fund please contact Pension Matters today.
