How protected is your pension?

How protected is your pension?

By Paul Lewis

Hardly a week goes by without another pension scheme being taken over by the Pension Protection Fund (PPF). It exists to rescue final salary pension schemes when a firm goes bust – or when it would go bust if it wasn’t relieved of its pension liabilities.

The PPF began in 2005 and now provides pensions for more than 230,000 individuals from more than 850 schemes.

The PPF pension (or “compensation”, as it’s called) will usually be less than the one promised.

One big difference is that the pension in payment will only be raised each year in line with the Consumer Prices Index up to a maximum of 2.5% (CPI is currently 3%) and that will only apply to a pension earned from April 1997, so any pension earned before that date will be frozen.

Most schemes outside the PPF raise pensions each year with the Retail Prices Index – which is higher than the CPI – and many index-link the pension earned in years before 1997.

So, as the years pass, your PPF pension will be lower than it would have been. If you’ve already retired at the age set down by your scheme, then you’ll initially get the same pension as you did before, subject to the limited inflation protection described above.

If you’re below the pension age laid down by your scheme – whether you’re drawing the pension or not – your PPF pension will be 90% of the amount promised. It is also capped.

If you reach scheme pension age at 65, the cap is £34,655 after the 90% is applied. If scheme pension age is younger than 65, the cap is less.

New rules began in April 2017, which mean that the cap will be higher for those who had more than 20 years of membership of the scheme.

Before you reach scheme pension age, all your entitlement will increase with CPI subject to a cap.

Once in payment, inflation proofing of CPI capped at 2.5% will be applied only to the pension earned from April 1997.

When you die, your spouse or partner will normally get a pension of half the amount paid to you. 

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