Concerned About Your UK Company Pension Scheme’s Health?

5Not to worry, we have the UK’s Pension Protection Fund. But know the fine print.

In the UK, a company can’t default on its pension obligations unless it goes into liquidation.  And the UK Pensions Protection Fund (“PPF”) picks up the bill – within limits — for any UK company being dissolved without having adequate funding for its current and future pensioners.  We usually hear the short sound-bite that PPF guarantees 100% of benefits if you’re already retired and 90% if you’re below your scheme’s retirement age.

It’s the “within limits” bit that’s important to understand, and it’s a bit more complicated than it looks.

PPF’s current yearly maximum is limited to a cap of £38,505 at age 65.  If you retired at your scheme’s normal retirement and are getting a pension of £38,505 or less, you get 100% of your pension.  If you have a pension of £20,000 great, you get £20,000 if it’s £50,000 you’ll lose anything over £38,505.

But note the 100% only applies if you are older that your plan’s usual retirement age when the scheme goes into the PPF.  If you took early retirement, and you are older than the plan’s usual age, that’s fine – but if you took early retirement and are still under the plan’s age, your payments are subject to a 90% cap.

Also, if you retired early and are younger than the plan’s usual age the cap itself is reduced. While it’s £38,505 assuming a retirement age of 65, the cap falls to £32,770 if you are 60, and this is subject to the 90%, i.e. £ 29,493.

There’s a bit of the upside.  If you have more than 20 years service, the cap increases by 3% for each full year of service beyond 20 years.  There’s a downside for long service as well — for the portion of your payment related to pensionable service prior to 1997, there is no increase for inflation.  So if you have a number of years service prior to that, that portion of your payment will not increase each year.

PPF may cover less than you’d expect once PPF caps and adjustments are applied.  Increases for inflation are in line with PPF rules (like CPI inflation capped at 2.5% max), which may be different from your original scheme.

If you are an active or deferred member pre-retirement age, the amount of the pension you would have been entitled to when your employer went under is determined and gets inflation adjusted during the period until you reach your scheme’s retirement age.  At that time, you’d receive 90% of that calculated value (plus inflation) subject to the cap – and this assumes that PPF hasn’t changed the rules or calculations in the meantime.

If you decide to transfer your pension out of your company scheme because you are concerned about its ability to keep on, you do “lose” the benefits of PPF that would protect you and guarantee all or part of your pension income.  But it’s important to know the limitations of the PPF as well.







Pamela Morgan CPA
UK Liaison and Guest Blogger
Investme Financial Services LLC

What’s your most valuable asset? Most common answer – My Home

jamal-investme2Or not.  Many people don’t naturally first think of the value of their retirement plan.

If you are in the fortunate position of having a defined benefit (also known as a “DB” or “final salary”) pension, perhaps you have read in the press about the high  “transfer values” being offered to folks who choose to transfer out of their existing DB plans. This transfer value is the amount that your pension provider is willing to pay you to transfer out of its plan – forever – to set up a new pension yourself, with help from advisors.   The value is a multiple of the pension you’d receive times a certain number – and with numbers quoted ranging from 20 to 40, the amount can be an eye-opener.

You may be concerned about headlines regarding high levels of underfunded plans, or schemes that although fully funded, are closing plans to new accruals, i.e. not adding anything to what you’ve already accumulated.  Some advisors portray transferring out of a defined benefit plan as a way to be able to take the 25% tax free cash that’s been enjoyed by the new pension freedoms available for the last couple of years with the UK Pensions Freedom Act.

But do you know your “transfer value” – it may be on your latest annual pension statement or perhaps you need to write to your scheme administrator and request it.  Even if you have never thought about transferring your pension, it’s very good to know what this value might be.

Unrelated to concern’s over a scheme’s health or perhaps recklessly releasing cash, there are other much more interesting and compelling reasons to at least consider a transfer.

+ You take control of your likely largest financial asset.  You know the exact amount that you have for your retirement, taking away the life expectancy gamble of dying early.

+ You can pass on the value to your family, it doesn’t end when you (or your spouse) dies, and will likely provide better future income for your husband or wife, as it’s not automatically reduced to a widow/widower’s pension upon your death.

+ You have complete flexibility on how much you how want to take and when you draw it, you’re not tied to a fixed monthly amount.  So as your income needs (and tax situation) change over the years you’re retired, you have flexibility in planning both.

+ Transfer values are currently so high that a lot of the investment risk can be reduced.  A 2% net investment return can provide the same level of pension, with some left over.

+ If you do need some cash, perhaps to pay off a mortgage or to help your children buy a home, taking the tax-free portion at age 55 is an option, although this does put a big dent in the amount left for future investing.  But if you have other sources of retirement funding it may be something to consider.

Knowing your transfer value is just the first step. You may have a recent annual pension statement that includes the transfer value.  Or you may need to write to your pension scheme administrator and request your transfer value.  They must respond to you within 30 days, and the value they give you will be valid for 3 months, during which time you need to take advice whether this transferring out is good – or bad – for you.  Take your time!  But as a first step, check that value.







Pamela Morgan CPA
UK Liaison and Guest Blogger
Investme Financial Services LLC


Strong pension, no problem? Maybe.

jamal-blogWe all recall last year’s demise of BHS and its failure to protect the company pension scheme.  Frequent news headlines report huge numbers where future pension liabilities exceed assets, and estimates of overall underfunded final salary (defined benefit, or DB) schemes are at 80 percent.

Years of low interest rates and increasing lifetimes have made it difficult for pension investment trustees and their actuaries to ensure that there’s enough in the pot to make good on pension promises.  DB schemes were originally designed for folks living 10 years into retirement – not 30.

It’s no wonder we worry about the ability of our companies to still be around when it comes time to draw our pensions.  And if a company goes bust, we have the PPF (Pension Protection Fund) in the UK, although there are limitations on that as well.

So your DB pension scheme’s not in deficit, life’s good? Not necessarily.

While many DB schemes (including all of the FTSE 100) have been closed to new employees for years, the cost of providing for existing members is still there and growing.  Increasingly, even well funded schemes are at this and concluding that changes must be made.

Marks & Spencer closed its scheme to new accruals from March 2017.  No additional benefits will continue to accrue to existing members – they’ll still get their pension, but future work won’t count.  Royal Mail made a similar announcement earlier this year, one that is likely to lead to a postal strike in the UK very soon. A company does not have to be in a situation like Tata Steel where the choice is closing the pension fund or closing the company.

34% of the FTSE 100 schemes are now closed to future accruals and the number is likely to rise. Some companies are rewriting other aspects of their schemes, such as making a “final salary” now a “career average earnings”.

There are a number of reasons for the large number of people transferring their pensions out of their company’s plan.  High transfer values (the multiple of an annual pension), wanting to take control of probably one’s largest asset and underfunding concerns may all play a part.  Considering a transfer out is a big decision and needs professional advice.  But uncertainty about changes to even strong plans is now adding another consideration to that decision.







Pamela Morgan CPA
UK Liaison and Guest Blogger
Investme Financial Services LLC