Pension Protection Fund

edited 30 November -1 at 1:00AM in Pensions, Annuities & Retirement Planning
7 replies 1.4K views
hoofhoof Forumite
54 Posts
Due to start receiving pension soon following early voluntary retirement. Normal retirement age for scheme is 60. Should the scheme go bust and I end up having to go to Pension Protection Fund, I wondered if different levels of protection were applicable until I reach age of 60?

Replies

  • JOHNGTJOHNGT Forumite
    108 Posts
    Up until your normal pension age (60) your are protected up to 90% of your pension up to a cap of £26840 at age 60 (less if you are younger). However, indexation of pensions once in payment at the PPF is only on benefits built up since 1997 (no indexation on benefits built up before that) and indexation is RPI capped at 2.5%. This indexation is probably worse than you scheme offers.

    After your normal pension age it is protected 100% subject to the same indexation rules noted above.

    There is no guarantee that your scheme will end up in the PPF even if your employer goes bust. The PPf will make an assessment of the scheme and whether it can operate on a stand-alone basis.
  • hoofhoof Forumite
    54 Posts
    After normal pension age does 100% protection mean no cap applies?
  • JOHNGTJOHNGT Forumite
    108 Posts
    Yes, but they do have the power to change their rules in future if they are skint!
  • downshifteddownshifted Forumite
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    I think I understand this but would one of you kind experts please work me an example?

    Say if I took voluntary retirement 4 years early, at 56 with a pension of £26840 and the scheme went into the PPF 2 years later, how would the PPF calculate what to pay me? Is any lump sum already taken ignored? If not how is it taken into account?

    Thanks for all your help on here
    Downshifted

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  • ZelaznyZelazny Forumite
    387 Posts
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    I think I understand this but would one of you kind experts please work me an example?

    Say if I took voluntary retirement 4 years early, at 56 with a pension of £26840 and the scheme went into the PPF 2 years later, how would the PPF calculate what to pay me? Is any lump sum already taken ignored? If not how is it taken into account?

    Thanks for all your help on here

    It's not entirely straightforward as it depends on the rate of inflation.

    To give you a hypothetical example:

    Suppose someone took retirement early at 56, and has a pension of £30,000 and a lump sum of £100,000 (which he got at 16:1, commuting £6,250 of pension to get it - so his original pension was £36,250)

    2 years later, that pension has risen to 31,500 and the scheme enters an assessment period for the PPF.

    From memory, the calculations would be roughly as follows:

    member is aged 58 and under Normal Pension Age, so compensation cap is: £29,205.78
    (from http://www.pensionprotectionfund.org.uk/Pages/PensionProfessionals.aspx - note that this does increase each year, but is *before* application of the 90%)

    Total value of benefits taken, revalued to now:

    Cash sum: 100000 when taken, uprated by increase in pension:

    100000 x 31500 / 30000 = 105000.

    Equivalent value in pension terms: 105000 / 16 = £6,562.50 p.a.

    Add Pension in payment now: 31500 + 6562.50 = 38062.50.

    Cap fraction is: 29205.78 / 38062.50 = 0.7673

    Pension needs to be reduced to: 0.7673 x 31500 = £24,170.30.

    then 90% is applied: 24170.30 x 90% = £21,753.27.

    So the pension in payment would be reduced to £21,753.27 from the assessment date.

    Important thing to note: any cash taken at retirement is still taken into consideration for this calculation. That said, at least you don't have to pay any of it back... If the scheme offers a cash benefit that doesn't require commutation of your pension, the PPF provide factors to let you work out how much pension it was equivalent to.

    Also, I'm doing this from memory - may have forgotten something :-)
  • hoofhoof Forumite
    54 Posts
    Many thanks for setting out calculations.
    If the normal pension age for the member in your example was 60, does the Cap/90% reduction etc cease to apply if scheme ok until after members 60th birthday? I understand that different, lower, annual inflation rates would be applied going forward, but presumably 100% of pension in payment would become base PPF pension?
  • ZelaznyZelazny Forumite
    387 Posts
    Tenth Anniversary 100 Posts Combo Breaker
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    If the member in question is over Normal Pension Age (whatever the PPF decide the normal pension age is for the scheme - it may be earlier than what's in the scheme rules) at the date the scheme enters the assessment period, then their benefits are not reduced. If a member is under NPA at the assessment date then the pension is reduced to 90% and the cap is applied.

    The exact definition for the NPA from their website is:

    "Normal pension age is the normal retirement date under the scheme rules, or such earlier age specified in the rules where the only condition for the member to retire without actuarial reduction is the attainment of a particular age or length of service. Where scheme rules permit members to retire before their normal retirement date without actuarial reduction, but any other condition or contingency (for example redundancy) applies, that rule does not usually operate to reduce the normal pension age of the member.

    It is possible to have separate tranches of benefits which have different normal pension ages, such as benefits payable for a period of service when that benefit accrued with a different normal pension age." (from http://www.pensionprotectionfund.org.uk/FAQs/Pages/details.aspx?itemid=11&search=t&text=NPA)
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