Pension: What happens to your pension if a company folds?

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Pension plans are an essential part of one’s retirement plan. Pensions help you and your employer make contributions to a fund set aside for a worker upon their retirement. Pension schemes have favourable tax treatment compared to other forms of savings because they are long term savings plans. 

Several businesses around the UK are struggling as a result of the coronavirus pandemic.

Thousands of businesses are failing or closing down, with many going bust.

Retail empire the Arcadia Group has collapsed, meaning 13,000 jobs are at risk.

The retailer’s demise has led to calls for Sir Philip Green and Lady Green, who run and own the company respectively, to fill the financial gap.

There is, however, a system in place which protects employees’ pensions.

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What happens to your pension if a business fails?

When you work for a company, you are offered membership of a pension scheme, into which the employer makes a contribution and you add to via your pay.

If that business collapses, then the contributions stop. 

A new owner may opt to take on the pension scheme.

Certain types of pension schemes go into a rescue scheme called the Pension Protection Fund (PPF).

The PPF pays pensioners already receiving their company pension and protects those who have yet to reach pension age.

This protection scheme is paid for, in part, by a levy on other pension funds.

However, not all pensions go into the PPF.

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Anyone with a defined contribution pension has built up a pension pot which belongs to them.

This scheme is often managed through a separate investment company, which will not go to the PPF.

Instead, the individual can decide how it is invested and how to manage it when they reach retirement.

The PPF, however, does work with defined benefit pensions, which are pensions where the employer effectively gives a pension promise about how much you will receive at your time of retirement.

This amount is often based upon your final salary or an average of your career salary.

What happens if your pension provider goes bust?

If your pension provider goes bust, the compensation you are entitled to will be determined by the type of pension you have.

It is also dependent upon whether your provider’s regulated by the Financial Conduct Authority (FCA).

The outcome is also contingent on the type of pension you have.

For defined contribution pensions, the outcome will depend on where your pension is saved. 

If your pension qualifies as a “contract of long-term insurance”, it will be 100 percent covered by the Financial Services Compensation Scheme (FSCS). 

You will also be eligible for the same level of cover for annuities purchased from pension providers regulated by the FCA.

If your SIPP provider goes bust, you will then be eligible for compensation up to £85,000 only. 

For other types of pensions, what happens will vary depending on the underlying investment.

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