On July 3rd, PwC announced that the UK Pension Deficit is currently at an astonishing £460bn, meaning that the potential liabilities of the schemes are greater than the assets. The deficit has been brought about by increasing life expectancy, underfunding by companies, and a fall in equities and bond yields.
Due to this deficit, companies can’t currently guarantee that they will be able to pay pension benefits and further analysis by PwC showed that it will take until 2050 to halve the value of today’s total liabilities.
If your sponsoring employer were to become insolvent, your pension scheme may be accepted under the Pension Protection Fund (PPF). But beware, the benefits that you’re expecting may not be fully protected, and funding is not guaranteed. In addition to this, once the scheme has entered the PPF, you are no longer able to transfer out.
Under the PPF, your pension income is protected fully if you have already retired and are drawing down the pension. You will continue to earn the same annual income, however, only the part of the pension accumulated after April 5th, 1997, will be index-linked up to a maximum of 2.5%. Pension benefits accumulated before this date will not be protected by this.
If, however, you have not yet retired and have not reached the scheme’s normal retirement age when it enters the PPF, your income will be capped. The annual income is placed at 90% of the cap for the age you are when the scheme goes into the PPF, or 90% of your expected annual income, whichever is lower. Consequently, your retirement income is dramatically reduced, and you are locked in to receiving the pension income at the scheme’s retirement age. Information regarding the age caps can be found here.
Fortunately, it is possible to remove yourself from the risk of going into the PPF by transferring benefits out of the scheme to a personal pension such as a QROPS or a SIPP. These schemes are recognized by and registered with the HMRC, and were designed to offer the ever-increasingly important feature of choice to those that wish to make the most out of their pensions.
It is worth noting that not all company schemes are underfunded, but it is important to identify whether yours is, and to keep informed on the deficit situation. Take an active interest in your pension benefit, set aside the time for an annual review – or better still, get a specialist to do it for you.