Had Royal Bank of Scotland been allowed to fail, says the BBC, Sir Fred Goodwin’s defined benefit pension – estimated to be worth £703,000 a year – would have been replaced by nearer £20,000 from the Pension Protection Fund (see below). Luckily for Sir Fred, the government bailed out RBS. But what pension safeguards are there for the rest of us?
If a 100% secure pension is your priority, get a job in the public sector. The government still offers defined benefit pensions – where the amount paid out each year is a fixed proportion of your final salary. As the ex-head of pensions at Boots, John Ralfe, points out, this commitment could cost taxpayers more than £750bn. Nonetheless, a scheme that will pay Gordon Brown’s pension is highly unlikely ever to be allowed to fail.
Some employees in the private sector also have defined benefit pensions, although these are being phased out as firms look to save money. However, Dr Ros Altman, a former pensions adviser to Tony Blair, warns in The Daily Telegraph: “This year will see the reality of companies being bankrupted by their pension schemes.” If that happens, and the pension scheme is insolvent, employees have to rely on the statutory Pension Protection Fund.
The good news for those at or above their employer’s scheme’s normal retirement age, plus anyone already retired on the grounds of ill health, or receiving a pension in relation to a deceased spouse, is that the scheme covers 100% of their pension, albeit any annual inflation uplift may be capped at 2.5%.
Those who have not yet reached normal retirement age, regardless of whether they have actually retired or not, are entitled to 90% of their pension, but subject to an overall cap. This cap varies depending on an employee’s age when they become entitled to compensation. For someone aged 65, for example, the cap is £30,856.35 per year. 90% of that is £27,770.72 and also normally subject to an inflation uplift cap.
What if you (and hopefully your employer) are funding your pension pot on a money purchase (also known as defined contribution) basis? This might be via a stakeholder or self-invested personal pension designed to buy you an income, or annuity, on retirement. You can relax. Insurers are required to ring fence pension assets from their own. So if they go bust the assets should be 100% guaranteed. But do be warned, though, their performance isn’t.
Lastly, if you have bought an annuity but an insurer fails, the Financial Services Compensation Scheme covers the first £2,000 of your pension, plus 90% of the rest with no cap. Not perfect, but not bad.