What happens to my pension in the event of liquidation?
If your employer goes into liquidation, your first concerns may well be focused on the immediate future – what does this mean for your job? Are you going to be entitled to redundancy if your job no longer exists? When are you going to have to start looking for new employment?
However, in the midst of your immediate concerns, you should also look further ahead and consider what this means for your pension. As an employee it is likely that your employer was deduction a portion of your wages each month and, along with their own contribution, placing this money into a workplace pension scheme. As this happened automatically and was done on your behalf, it may well be the case that you have little knowledge about how much money was in your pension pot or even who the pension provider is.
The good news is that there are safety nets in place to protect employees against exactly this type of situation. There are two main types of pensions and company liquidation will affect each of them differently:
- Defined contribution schemes are the most popular type of workplace pension. In these schemes, you pay in to your pension through a deduction direct from your salary and your employer will also add their own contribution. The size of the pension pot when reaching retirement depends on the level of contributions made and crucially, how this money has performed over time. Thanks to so-called pension freedoms, there is more flexibility than ever with what to do with this money when you reach retirement age. You can draw the money out in one lump sum (although this will have tax implications), drawdown smaller regular amounts as and when these are needed, or use the pension pot to purchase an annuity which will provide an income for life.
The important thing to remember about these types of pensions is that they are administered externally. Therefore in the event of your employer becoming insolvent the pension fund you have built up will not be affected. If you are in a defined contribution scheme the biggest risk is that your employer has failed in their duty to forward your monthly contributions on to the selected provider. It is therefore prudent of you to keep an eye on your pension and ensure your salary deductions are being channelled to the correct place. If your employer did not divert your contributions to your pension scheme, you will need to liaise with the appointed insolvency practitioner of the company and seek compensation.
- For those in a defined benefit scheme, also known as a final salary scheme, the rules are different. In these schemes, the money is not typically invested in an external pension scheme and the retirement income offered has no bearing on how contributions have performed over time. Instead an agreed amount is paid by the company upon the employees’ retirement. Should the company enter liquidation, it is likely that there will simply not be enough money to cover these pension liabilities. In this instance the Pensions Protection Fund (PFF) will ensure that employees receive a pension as promised. For those who are beyond retirement age when their previous employer entered liquidation, their pension will be paid in full. For those who retired early or have yet to retire, their pension will be protected up to 90 per cent of the value promised. These figures are subject to an annual cap which is set by the Department of Work and Pensions (DWP). From April 1st 2018, the cap at age 65 is £39,006.18. When taking the 90 per cent level into account, this equates to a protected figure of £35,105.56 per year.
If you are concerned about your pension following company liquidation, you should contact your pension provider or the PPF directly.
If you are a company director and are considering liquidating your company, and would like to know more about what this would mean for you and your employees call us today to speak to a licensed insolvency practitioner. We can offer you a completely free no-obligation consultation where you can learn more about the various liquidation options and understand the most appropriate course of action for you and your business. With 93 offices across the UK, you’re never far away from expert and confidential advice.