Is my pension fund safe?

24th September 2008

Martin Bamford, a Chartered Financial Planner at Informed Choice, examines the financial protection for pension funds, investments and savings.

The recent crisis on the global financial markets has highlighted issues surrounding the safety and security of pension funds.

As your pension fund is likely to be your main source of income in retirement, understanding how it might be affected in the event of a company collapse or stock market decline is essential.

If you have money in a bank or building society deposit account then you probably already know about the Financial Services Compensation Scheme. This provides a safety net to ensure that up to £35,000 of your deposit with each separately licensed bank is fully protected. For joint accounts this is extended to £70,000.

There are, of course, some potential issues with this compensation scheme. Some banks have various brands under the same regulatory authorisation, so simply spreading your money around the banking system might not extend your protection. If your bank did go bust then it could take some time to pay compensation, up to six months from the declaration of default.

The Financial Services Compensation Scheme (visit www.fscs.org.uk for more information) also covers 'long-term insurance', which includes invested pensions and pensions in payment. The compensation limit for this is 100% of the first £2,000 and 90% of the remainder of the claim, with no upper limit.

Occupational pension schemes are subject to different rules. The Pension Protection Fund (www.pensionprotectionfund.org.uk) was established to pay compensation to members of eligible defined benefit pension schemes where the employer became insolvent and there are insufficient assets in the pension scheme to cover liabilities.

Compensation limits under the Pension Protection Fund vary from 100% compensation if you have reached normal retirement age or 90% compensation if you are younger.

Of course 'safe' means more than just risk to your actual pension fund.

When talking to our clients about risk, we also talk about inflation risk, shortfall risk, interest rate risk and income risk. Investing your pension fund in a diversified range of different investment asset classes and conducting a regular review - at least once a year - with an independent financial adviser, are both good ways to reduce risk when it comes to your retirement planning.

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