Probably a silly question about Pensions and their Safety

princessdon

I know with savings there is a money guarantee if the bank goes bust etc to a set value.

Is there a similar thing for Pension Companies?

Ie how safe is your investment this way. I know money can go down etc, but is there any liklihood of losing it all?

jamesd

Yes, it's very well protected. The type of protection depends on exactly how the money is invested but in all cases of defined contribution/money purchase pensions there's excellent protection. To start:

1. It's standard practice for a pension pot to be held in a trust that is separate from the pension company, so if the pension company goes bust the pension money isn't affected.
2. If insured funds are used, often ones beginning with "pension" then the rest of the fund name, then that usually means it's an insured pension fund and there's some extra protection due to the insurance FSCS rules that cover 90% of the money with no cap. This mainly matters in cases of fraud, since there's already great bankruptcy protection.
3. If it's not a pension type of fund, then there's still FSCS protection for £50,000 for each fund house your money is with, and £50,000 for the pension company itself. Again this matters mainly in cases of fraud, since the different company or trust rules provide protection from bankruptcy anyway.

There's also pretty good protection now for final salary schemes, except for those who, roughly, are into the higher rate tax band, who might end up going over the cap on how much the Pension Protection Fund will pay. It's not actually higher rate tax payers, that's just an approximation to give some idea of who might be affected by their cap. For others they are likely to pay out 90% of the due pension. However, there can be major funding shortfall cases where this might vary. If this matters to you, you should really read the full PPF rules. Particularly if you're in a very badly underfunded scheme.

So, no, except by screwing up on the investments, you can't really expect to lose it all these days. And in the cases where you could, you'd also be losing it if it was in an ISA instead.

The biggest risk other than bad investments is probably fraud by the pension company that causes the money not to be paid to its trustee or holding company, in which case there might be just the £50,000 cap on the fraud payout.

If you buy an annuity there's also very good protection to ensure you'll continue to get fully paid. Though I'd still like to use several companies instead of just one just to further reduce that small risk.

princessdon

My thanks for your very comprehensive and easy to read reply. I feel safer addding to our pension pot now.