I showed my nine-year-old my pension app this week. I proudly showed him my balance, oh so close to six figures. Look at what mummy has saved up and can start to spend in 12 years’ time. He was impressed, he knows what a pension is and what it means. I am excited to understand what my pension means and that I am well on my journey towards financial freedom.
Do you know how much is in your pension and what it’s worth in the future? Do you know when you can access this money? And do you know what type of pension you have? Do you know how your pension money is invested and what fees you are paying?
There are a few things to understand with your pension, but fundamentally it’s JUST a savings pot for the future you, albeit a tax efficient one. The future you who will eventually stop working and need to obtain income from these pension savings.
Firstly, Types of Pensions – Are you DB or DC?
There are two main types of pension. The Defined Benefit (DB) and the Defined Contribution (DC). I know, the words are complex. But don’t fear, this is what they mean.
DB Defined Benefit (often known as a Final Salary Scheme)
This is a type of pension offered by both public and private companies, and in recent years, it has become rarer as it’s a lucrative employee benefit. This gives you a guaranteed income for life which you’ll receive much like a salary in monthly instalments each year after you retire until you no longer need it. The amount you receive will typically be based on how much you earned and how long you were employed there and whether you retired at, before or after your retirement age (as defined by the scheme).
Often a DB scheme will have a similar name to the company that offered it to you, but it’s not managed by your employer. This means your money is held separately from your employer and managed by an independent scheme trustee. If you’re considering transferring out of your DB scheme, you should take advice from a qualified, independent and ideally recommended financial advisor. This is a legal requirement if your pension is worth more than £30,000.
DC Defined Contribution
Many modern pensions are defined contribution. This is where you or/and your employer pay into a pension pot. This pot will grow over time with contributions and the value of the investment, but there is no guarantee as to what it will be worth in the future.
You can have various pots of DC pension contributions from several different employers which can be complex to keep track of. It might make sense to combine these into the same place, annual fees and transfer fees dependant.
The Pension Protection Fund (PPF) is Here to Help
The PPF is passionate about pensions and are here to protect your private DB pension should anything happen to your employer. Pensions are often in the news, and you might be worried about what has happened to your pension if your previous employer has gone bust. Do not worry, the PPF protects close to 10 million people who are part of 5,200 pension schemes.
If a private sector employer collapses and its DB pension scheme cannot pay members what they were promised, the PPF pays compensation for their lost pensions. The PPF is funded by a charge (known as a levy) to eligible pension schemes plus the returns from its investments and assets from pension schemes transferred into the PPF.
The PPF commissioned some research with members of DB schemes protected by them and found the following worrying responses about lack of understanding and engagement with their pensions
- One in three people don’t think they’ll have enough to live on in retirement
- One in four people (24 per cent) believe that their DB pension income will be the same as their annual salary
- Just two fifths (40 per cent) have discussed pension pots and savings with a professional financial adviser
- Approximately 7.5 million private DB pension savers (75 per cent) don’t know their pension is protected by the Pension Protection Fund
It just takes a bit of time, digging through paperwork and maybe some conversations to get an understanding of your pension. Just think of the reassurance you will feel when you know what your pension is worth. You can plan effectively for the future you with confidence.
The BIG DB Questions
The PPF have answered the BIG questions you might have about your DB pension.
I’ve left the company my DB pension scheme is with – how does this affect my pension?
Whether you’re working for the employer who offered the DB pension or not, you’ll still receive a pension from your scheme and the amount you get will typically be based on how much you earned (sometimes an average salary, sometimes a final salary) and how long you were employed there.
After leaving an employer all the pension benefits you accumulated in your DB pension scheme during your service, including those contributed by your former employer, will still belong to you.
The big things to check are that your contact details are up to date and to check your annual statement which will provide detail on what your pension is worth to help you to plan for your future.
If you’ve lost track of the details of your scheme the government’s Pension Tracing Service can help you track it down. Your former employer’s HR or pensions team may also be able to answer any questions you might have and help you get in touch with the scheme.
What happens to my scheme if my private sector employer/previous employer fails?
Your DB pension is protected by the PPF, and this means, if your employer fails and your scheme doesn’t have enough money to pay you your promised pension, you’ll be compensated for your lost pension.
What happens to my DB pension scheme when I die or if I divorce?
Many DB pension schemes provide survivor benefits to a legal partner when you die. This differs for every scheme; you can get this information from your annual pension statement or get in touch with your scheme. There might also be benefits for your children if you die before they reach a certain age. This information should form an important part of your estate planning.
In divorce a pension is considered an asset, the same as equity in a house or savings/investments. Please consider legal advice with the assessment of pensions in divorce due to the complexity involved.
I’ve recently been advised to transfer out of my DB scheme – is this good advice?
A question that fills me with fear and dread. I have read too many articles in the financial press regarding people who have been badly advised/scammed and have lost their life savings.
If you transfer your retirement benefits out of a DB pension scheme, you’re essentially giving up an income for life in return for a cash value. There may be reasons why transferring out of your DB pension may be beneficial for you, but for most people, this will not be the case.
If you’re thinking about transferring your pension out of your DB scheme, you should speak with an Independent Financial Advisor (IFA) who is recommended and approved by governing bodies. This is a legal requirement if your DB pension is worth more than £30k.
I urge you to make 2022 the year of the pension, to understand what pension you have, how much its worth and hopefully feel reassured that you have plans in place for the future over above the State Pension. For more much invaluable information on Pensions, visit the Pension Protection Fund website.
This is a collaborative post with the Pension Protection Fund.