Understanding the PPF
IF YOU belong to a final salary pension scheme then you should count yourself very lucky. Not only do the retirement benefits far outweigh those of defined contribution schemes (where you just build an investment pot), but firms have been dropping them like hot potatoes meaning most people no longer even have the option of joining one.
But while you can draw comfort from the fact that you will have a guaranteed income in retirement based on your final salary, some members may have concerns about how safe their scheme is.
This is where the Pension Protection Fund (PPF) comes in, but how exactly does it work and what level of your pension does it protect?
The PPF was set up by the Government in 2005 to offer protection to members of defined benefit – also known as final salary – pension schemes with an employer.
A compensation claim is triggered when an employer becomes insolvent and it becomes clear it cannot afford to pay what is due to members because of insufficient assets.
The pension scheme itself applies to the PPF which then makes and assessment of the scheme. If it qualifies, 90% of benefits for members below Normal Retirement Age (NRA) is paid by the fund.
However, there are caps on the annual amount payable depending on your age and how many years’ service you have with the company.
Those who are over the NRA or who have retired early due to ill-health receive 100% of the benefits that would have been payable if the scheme had continued as normal.
Full compensation is also usually paid to anyone receiving a survivor’s pension, such as widows or widowers and children.
Compensation payments rise in line with inflation each year, subject to a maximum of 2.5%, however this only applies to pensionable service dating from April 1997.
When considering pension planning it’s always a good idea to have sufficient guaranteed income to cover the essentials.
If you have a state pension and guaranteed income from a final salary pension scheme it gives you certainty.
It enables you to cover your dayto-day expenses without resorting to buying an annuity if you choose not to with your remaining money purchase funds. Annuities for most are not particularly good value now but they may become a good option later
Having sufficient guaranteed income frees you up to keep any remaining funds in money purchase pensions invested.
This enables you to take a bit more risk with your pension funds, if you have the risk appetite, allowing you to pay for the enjoyable things in life rather than just covering basic needs.
Remember, just because your final salary scheme is quoting you a high transfer value it doesn’t automatically mean you should take it as having this guaranteed income gives you an added layer of security in your retirement.
Andy lives in Wokingham and has worked as a financial adviser for over 30 years. He is married with three grown-up children. Faron Partnership offers personal financial advice, including retirement, investment and estate planning. Any information or views expressed in this article should only be acted upon within the context of your own circumstances with the help and guidance of a professional financial adviser. Faron Partnership Ltd is an independent financial adviser which is an appointed representative of ValidPath Ltd which is authorised and regulated by the Financial Conduct Authority.