Defined benefit pension schemes will protect 100% of savings for those who have already retired and up to 90% for those who have yet to retire.
However, defined contribution pension plan holders are protected to a maximum level of £85,000 under the Financial Services Compensation Scheme (FSCS).
To be eligible for any type of pension protection, an individual must ensure their pension provider is an authorised firm registered with the Financial Conduct Authority (FCA).
Is my pension protected?
There are different levels of pension protection in the UK depending on what type of pension it is and who is providing it.
We go into the details of different pension schemes and how much they're protected later, but it's important to make one key point first.
Only pensions invested with financial institutions that are regulated by the Financial Conduct Authority (FCA) are protected.
When looking at your pension documentation, check the firm is protected by the Financial Services Compensation Scheme (FSCS).
If this fund sounds familiar, that's because it's the same one that protects savings and other investments in the event of a collapse or failure.
So, if a pension provider goes into administration and they are covered by the FSCS, the customer will find that their pension is protected - but only up to a limit of £85,000 as we explain below.
There are different rules for some pension schemes that will see the holder protected to the level of the full amount of the pension.
However, the important takeaway here is that some customers will only be protected up to a level of £85,000 if their firm goes bust.
Who protects pensions?
The FCA regulates companies who are authorised to provide pensions in the UK while the FSCS helps to protect pension balances.
If a pension provider looks like they're struggling, it's possible they will sell their pension investments to another provider rather than going bust and leaving pension holders with limited protection.
One recent example of this is Heritage Pensions Limited who went into liquidation in March 2022 but had sold their self-invested personal pension (SIPP) book to another authorised firm in November 2021, so those pensions were transferred and protected.
As we would expect, the FCA prefers companies to make an orderly exit from the market and protect pension holders wherever possible.
While there is protection up to £85,000 under the FSCS, this will not meet the deposits held by many pensioners, especially if they are close to retirement and have built up their savings over 30+ years.
Defined benefit pensions
A defined benefit pension is a type of workplace pension scheme that is based on the earnings of an employee either at the time of their retirement (final salary) or during their time enrolled with the scheme (career average).
While defined benefit schemes are increasingly rare these days, many people will still hold them from previous employers or were enrolled in one when they were more common.
Defined benefit pensions are protected by the Pension Protection Fund (PFF).
If a company has a defined benefit pension scheme and goes bust, they can apply to have those pension schemes considered for compensation under the scheme as long as there is no chance the scheme can be rescued and there isn't enough money in the scheme to pay the level of benefits offered by the Fund.
There are different levels of protection depending on whether a person has retired or not.
If a defined pension scheme goes bust after an individual has retired and started to claim their pension, the person should be protected with 100% compensation.
This means they won't lose any of their pension but they might lose some pension increases, depending on how long they have been enrolled in the scheme.
Any payments built up before 5 April 1997 will not increase, while payments after that date will rise in line with inflation each year (up to a maximum of 2.5%).
So, those who have already retired with a defined benefit pension are in the best position if their provider collapses.
Yet to retire and early retirees
Individuals who have yet to retire at the time their pension provider collapses will receive up to 90% compensation. This will be paid from the normal retirement date of the scheme.
If a person has decided to retire early but have not reached the usual pensionable age of the scheme, they will also receive up to 90% compensation.
This used to be capped at a level decided by the Department for Work and Pensions (DWP) each year, with the last cap set at £41,461 per year from 1 April 2021.
However, the cap was challenged and defeated in the Court of Appeal in July 2021 and no longer applies, meaning pension holders will not be bound by a strict limit (although the 90% proportion cap still applies).
To put this in context, if a person is 55 is expecting a defined benefit salary of £50,000, they will receive a maximum of 90% or £45,000 per year. Under the previous rules, that would've been capped at £41,461.
Very few people were affected by the cap (the PPF said 0.5%), but it's a good ruling to be aware of for those who have long-standing pensions that may be paying out significant sums each year.
Defined contribution pensions
Defined contribution pension schemes are far more common than defined benefit schemes and allows pension holders to build up a pot of money that is invested in some way or another.
There are several types of defined contribution pension scheme to be aware of. There are different layers of protection involved in these, but the base level of protection is £85,000 per pension holder if something goes wrong.
Many workplace pension schemes will be defined contribution schemes where an employer and employee both put money into a pension pot that is then invested.
While some employers will manage their pension schemes themselves, it's more likely they will use another firm to invest the money. That means that, if the employer goes bust, the pension money is protected because it is ring-fenced in an investment pot outside the company.
However, it is still theoretically possible for the company investing the pension to collapse.
As we mentioned earlier, the FCA monitors such situations and firms are encouraged to act transparently when it comes to their investment funds. Yet some firms will still collapse without a plan and without selling their investments on to another firm.
Pension holders will only be entitled to a maximum of £85,000 per account under the FSCS if their pension provider goes bust without taking steps to protect the pension book.
Personal pensions are a type of defined contribution pension, but they are arranged by an individual rather than an employer.
The same rules apply when it comes to a pension provider collapse - pension holders will be protected to a maximum of £85,000 per account under the FSCS.
Self-invested personal pensions (SIPPs) are, as the name suggests, a type of personal pension. However, it's worth discussing them in slightly more detail because they are the subject of the most pension complaints (more on this below).
SIPPs have more flexibility on the type of investments that can be made and so they can be seen as riskier prospects, especially if pension holders don't take professional advice when investing their pension pot.
The basic rule for SIPP protection is the same as other types of personal pension: up to £85,000 per account is protected under the FSCS.
That said, SIPPs are ripe for mis-selling and fraud because of the complexities involved. That's why it's crucial that investors take professional advice before putting their pension pot into a SIPP and double-checks the firm is FCA registered and therefore covered under the FSCS.
Complaints about pension mis-selling have become more common in recent years, with compensation for such schemes doubling between 2017 and 2019.
Increased pension freedoms introduced in 2014 have led to more people being targeted by unscrupulous or fraudulent firms, with money then invested without proper financial advice being taken.
If money is invested in a firm that isn't covered by the FSCS, the whole pot can be lost. Even if a firm is covered by the FSCS but the investment is a poor one, customers can still lose a large proportion of their pension fund because of the £85,000 protection cap.
So, it's vital that people considering moving or withdrawing their pension pot take professional advice and understand the risks involved.
Customers can claim up to £85,000 if the pension advice given to them was poor, but this still may not replace a decent proportion of someone's pension pot and a successful complaint is not guaranteed.
Complaints about pensions
The Financial Ombudsman Service (FOS) publishes annual data about the complaints passed on to them and how many of them are upheld.
Their figures for 2020/21 show:
- There were 7,800 new cases related to pensions
- 3,021 (38.7%) of these were related to SIPPs and 2,431 (31.2%) were related to personal pensions
- Of the 558 SIPP complaints resolved during the year, 56% were upheld
- Of the 281 personal pension complaints resolved during the year, 22% were upheld
While these figures demonstrate that a significant proportion of people are successful in their pension complaints to the FOS, there are still plenty of people who are not seeing their claims upheld.
In any event, the £85,000 cap for compensation if a person has received bad pension advice is limited and might not make a great deal of difference to customers who have lost hundreds of thousands.
Summary: Check your pension
There are pension protections in the UK, but they vary depending on the type of pension an individual has.
Those with defined benefit pensions have the most protection and those who haven't yet retired will receive up to 90% of their pot in compensation if the firm collapses.
For those with a defined contribution pension, the level of protection is much poorer.
If a pension provider collapses and there isn't enough to pay the pension liabilities, customers are only protected to a maximum of £85,000 per account. This can mean a significant reduction in retirement prospects for many people.
In our guide to deciding what age to retire and draw your pension, we suggested that a person might need £20,000 from a private pension scheme to live a comfortable retirement. With £85,000 protected by the FSCS, that's only a few years of money.
The key thing to remember is that a firm must be regulated by the FCA for there to be any protection under the FSCS at all. So, check that a company is a fully regulated pension provider before investing with them and take professional financial advice first.
Plus, remember that pension investments naturally fluctuate due to changes in the market. This isn't a protection issue, rather a natural risk of investment that will usually even out over a person's lifetime investment.
One final point: as part of the Government's Pensions Dashboard initiative set out in the Pension Schemes Act 2021, pension holders will be able to bring together all information about their pension schemes and savings into one place. This is a development for the future but will help people keep track of their pension savings in one central location.
Unsure where some of your pensions are? Read our guide to tracing lost pensions.