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How safe is your final-salary pension?

Despite recent high-profile failures think very carefully before transferring out of your DB pension
January 25, 2018

The collapse of services provider Carillion (CLLN) is the latest in a string of high-profile company blow-ups, including Toys R Us and BHS, that have hit defined-benefit (DB) pension savers. And this comes as the Pension Protection Fund reports that roughly two-thirds of the DB pension schemes in operation in the UK are in deficit.

DB or final-salary pension schemes pay a retirement income calculated as either a percentage of an employee's final-year salary or an average of the income they earned during their employment. DB pensions have become much less common in recent years, with most younger employees likely to be offered defined-contribution (DC) schemes. While less valuable than DB pensions, DC schemes are fully protected in the event that an employer goes bankrupt as the savings in them are the property of members, unlike with a final-salary scheme where assets are owned by the scheme.

When Carillion filed for compulsory liquidation on 15 January its DB pension schemes had a reported deficit of £587m. The Pension Protection Fund is taking over management of Carillion's DB pension schemes, which have 28,000 UK members. Of these, 12,000 are already claiming their pension and they will be fully protected by the Pension Protection Fund. But those who are not yet drawing their pension will only get up to 90 per cent of what their pension was worth, subject to a cap, when they retire. In both cases any inflation-linked income rise will be capped at 2.5 per cent a year.

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