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.
If
you want to join in with this week's Finance Fridays then add your
link to the linky below. Any post concerning financial matters is
allowed. Full details here. It doesn't have to be published today as
you have until 23.55 on Tuesday 17th
May
2016 to join in.
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I always learn something from reading your Finance Friday posts - keep it up!
ReplyDeleteInteresting! I am going to have to delve deeper into your finance posts, I am pretty useless when it comes to such things! :)
ReplyDeleteI'm impressed with your financial knowledge, you always teach me something new in these posts.
ReplyDeleteI think it is shocking that companies do not have secure pension schemes.
ReplyDeleteI must admit it's something that always worries me a bit as most of my pension is in one occupational scheme.
ReplyDeleteWhy are we so bad with knowing where our pensions are and what they are doing, some great information here. I always worry about mine.
ReplyDeleteI am fairly lucky that my pension is with my old employer which is an investment bank and they do everything for me
ReplyDeleteI prefer not to think too much about it! I just hope NN will never go bust!
ReplyDeleteThere' so much to think about isn't there! Sometimes, I want to not be a grown up for a little while x x
ReplyDeleteThese are great these posts, a lot to think about too! Thank you so much for sharing :)
ReplyDelete