During a recession, it's more important than ever to take care of your finances. It's likely you'll have heard of the Pension Protection Fund mentioned in connection with BHS's pension deficit. But what exactly is it? We've put together all the important information you need to know.
What does the Pension Protection Fund do?
The Pension Protection Fund (PPF) is a lifeboat fund set up by the Government in 2005 for members of Defined Benefit pension schemes eg final salary schemes, should their employer go bust. Should this happen and if there aren't enough funds in the pension scheme to pay current and future pension payments it can ask to be bailed out by the PPF. Without this safety net many pensioners and members could potentially lose their pension. Today, there are around 850 schemes in the PPF and this number is growing.
What does the Pension Protection Fund provide?
Providing the scheme meets the PPF criteria, the scheme's funds will be transferred to the PPF, and pensioners and members will receive compensation payments direct from the PPF replacing their pension payments. Compensation payments will be lower than the pensions that would have been paid had their employer not gone bust and the scheme been able to continue to pay out full pensions.
Is the Pensions Protection Fund a government body?
The PPF is not funded by the Government. It is funded by levies on defined benefit schemes of solvent employers and from the funds of the schemes previously rescued by the lifeboat. Members of Defined Contribution schemes are not covered by the PPF.
Is the Protection Fund taxpayer funded?
No, compensation and the cost of running the PPF is paid for through levies on eligible pension schemes.
10 important things to be aware of
- Your pension scheme doesn't automatically go into the PPF. It can take about a year to assess if the scheme is eligible.
- Schemes won’t be rescued if a new employer takes it on, or if there are enough funds to buy-out pensions, at least equal to the PPF compensation level, with an insurance company.
- The PPF pays out different levels of compensation depending on your circumstances. Members will get less than they would have received if their scheme had not gone into the PPF.
- The PPF caps the amount it pays to members who haven’t retired or who retire early and haven’t reached their scheme‘s normal retirement age when their employer went bust. You can check the cap for each age group here.
- If you were older than your scheme’s normal retirement age when your employer went bust you’re entitled to receive compensation equal to your full pension. However annual increases to payments will be restricted. Only payments from pensionable service built up after 5 April 1997 will be increased in line with inflation, up to 2.5% a year. Payments built up before this date won’t be increased.
- If you retired early and haven’t reached your scheme’s normal retirement age when your employer went bust your payments will be reduced. Payments are restricted to 90 per cent of what you received, up to a cap based on your age when your employer went bust. The cap for a 60 year old is currently £38,505 a year, then 90 per cent is applied to give an annual payment of £34,655. Payments will be increased each year, as above.
- Is there a cap on compensation? If you have not yet retired you will receive 90 per cent of what your pension was worth when your employer went bust, subject to the cap. Your payment will be frozen, but it will be revalued in line with inflation each year from the date your employer went bust until your normal retirement age. Payments will begin when you reach your normal retirement age and will be increased each year, as above.
- If you die, compensation payments are made to children under 18 (23 if in full-time education) and to disabled children. Payments are generally paid to spouses or civil partners providing this was allowable under the scheme’s rules. Once in the PPF you cannot transfer out payments to another scheme. This means you aren’t able to consolidate all your pensions or use the pension freedoms from age 55.
- You have to be 55 years old or over to retire early - unless you have the right to take your pension earlier under the rules of your former pension scheme (known as protected pension age). If you want to receive your compensation early, you should contact us to ask for an early retirement quote. We will then confirm if you are eligible to receive early payments and you can then decide whether to apply or not. You cannot take your pension early. You have to wait until you reach your scheme's normal retirement age. This is likely to be between ages 60 to 65, but will depend on the scheme rules.
- Compensation payments can be shared on divorce with an ex-spouse or ex-civil partner if a court makes a pension sharing order.
Where can I find out more?
For more information go to the Pension Protection Fund website.
You can read more on the Government's website here.
Thanks to Kate Smith at Aegon.
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