It’s a sign of the times that unemployment is on the rise. If you’re facing redundancy it is important to know how your pension planning could be affected by your job loss and the option available to you.
The extent to which your pension planning will be affected depends on several factors, including the type of pension scheme, your age, how long you’ve been a member and whether your employer has gone bust. However, your pension pot should be safe and you’ll still be able to use it to fund your retirement, although your contributions will need to stop.
To understand the affect of redundancy on your pension ask yourself the following questions.
What type of pension do you have?
Occupational pensions can be either salary-related (such as a final salary scheme) [link] or a money purchase scheme [link]. It is important for you to know what type of pension your ex-employer offered as this is an important consideration should you decide to transfer your pension. [link to transfer article?]
How old are you?
If you are 55 or older you may be able to take early retirement rather than redundancy. Depending on your circumstances this may be worth considering. If you want or need to continue working, you can defer your pension payment if you want or work part-time while receiving a pension.
How long have you been a member?
If you’ve been a member of the pension scheme for less than two years, you should be able to get a refund on you contributions. If you’ve been a scheme member for longer than this, then your pension will be “frozen” [LINK].
What happens with a frozen pension?
The term “frozen pension” is misleading, as the pension fund should continue to grow a bit. Just how much it will grow depends on the type of pension.
If it is a money purchase scheme then the funds will continue to increase (or fall) in line with the underlying investments. The pension provider may also continue to charge some administration fees.
If it is a defined benefit pension scheme, such as a final salary scheme [link], then your pension benefits should continue to increase in line with inflation (assuming you left the scheme after 1990).
Has your employer stopped trading?
If your redundancy is the result of your employer going bust, then the situation varies depending on the type of occupational pension scheme the firm offered. If it was a salary-related scheme (such as a final salary pension) then your company’s scheme can join the Pension Protection Fund [link]. This will provide compensation of 90% of your pension rights (assuming you aren’t retired) subject to a compensation cap (currently £29,748).
If your employer offered a money purchase scheme then your pension fund will be the accumulation of your and your employer’s contributions. The pension scheme will be run by a pension provider, and you will have your own individual ‘account’, so it should not be affected by your employer going bankrupt.
The next step for your pension
Once you get another job, you may wonder what will happen with your frozen pension. Here there a number of choices. You can leave it where it is and just keep an eye on it. If you’d like a clean split from your former employer you can look into transferring the pension to another scheme. You may want to consolidate your all you pension funds into you new employer’s pension scheme.
Trying to make sense of all the implications for your pension and general finances following a redundancy will be difficult. Certainly it makes sense to get some independent financial advice if you’ve been made redundant. They’ll be able to give you some advice about how to invest you redundancy payments, as well as explain your frozen pension and the options available to you.
For more information on how your redundancy may affect your retirement plans or for advice on transferring a frozen pension you can contact a local independent financial advisor through the form below.
