How safe is your pension?

As most people ought to know by now, the first £35,000 of your savings are covered by the Financial Services Compensation Scheme. But what happens if your pension provider goes bust? Merryn Somerset Webb explains the ins and outs – and has some good news.

By Merryn Somerset Webb

published 30 September 2008

in Features

There's been much talk over the last month about how secure our savings are. What happens if your bank goes bust? Do you get your money back? How much? How soon? And what about interest? We've looked at this before.The good news is that there are ways to make sure that, however bad things get, you don't lose out.

But what about your pension? This is something you don't have to worry about much if you work in the public sector in any way. Not only is the average public sector salary now higher than the average private sector salary but the salary comes with perks the rest of us can only dream of. The main one? A cast iron final salary pension. Work for the government and you'll get paid a good percentage of the salary you were earning when you retired every year until you die- however long that may be.

However the rest of us have a problem. We don't get final salary pensions unless we are very lucky indeed (most companies have shut their schemes down over the last decade). Instead we save money into equity-linked pension products and hope for the best. We're getting the worst. The UK equity market (the one in which most pension funds are most heavily invested) is down over 20% so far this year, as are almost all other stock markets. With every passing day our pension pots are getting smaller, and as a result our retirements are getting a bit more miserable. That might not be a big deal if you aren't retiring for 20-odd years, but if you were planning to be trundling round your garden listening to the radio of a weekday by this time next year and you hadn't yet moved out of equities into cash or government bonds, it really isn't good news. Think a caravan in Devon for your summer holidays rather than a cruise in the Caribbean.

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However, even more worrying for many at the moment- we've had a lot of emails about this- is the question of what happens if your pension provider- be it an insurer or your company - actually goes bust. Here there is, amazingly, some good news. And even more amazingly the news is better for those of us with market linked (money purchase) schemes than those of us with private sector salary-linked schemes. If you have the latter and the company you work or worked for goes bust you won't lose everything. If you have already retired- due to age or ill health - the Pension Protection Fund says it will "generally" make sure that you get 100% compensation. Your income won't change. If you have yet to start getting payments you will get 90% compensation "up to" a cap of just under £28,000. So while the "up to" bit is mildly worrying, in most cases only those with high pensions will lose out.

Not so for the rest of us- none of us should lose out. Our money purchase pensions are ring-fenced from our company assets- i.e. they aren't owned or controlled in any way by the company, and that means that they should still exist as they are even if the company goes bust. That doesn't mean that our funds aren't losing value as the stock market collapses, but it does mean they can't actually disappear. The same goes for the money invested in personal pensions (pensions we take out ourselves without reference to our employers). Say, says the Telegraph, that you held a Standard Life pension and that your money was invested in its managed fund. Even if Standard Life found itself in difficulties (which, by the way, is almost impossible to imagine) the investment would still be ring-fenced and still be yours. The same goes for SIPPs (Self Invested Personal Pensions), which are, for most regulatory purposes, just another kind of personal pension: the value of your investments is at risk (make bad decisions and you'll lose money) but the ownership of them is not. Right, so what if you have already retired and are receiving an annuity? Here again the news is good. You aren't 100% protected, but you do get the first £2000 of your income in full and 90% of the remainder with no limit. That's not bad.

This article is taken from Merryn Somerset Webb's weekly Money Sense email. Sign up to Money Sense here.