If a Company Goes Bankrupt, What Happens to Pensions?
Workplace pensions are a popular way of saving towards retirement, but what happens to pensions when a company goes bankrupt? Employees can face a worrying time if their employer is declared insolvent, particularly if they believe their pension is at stake.
Fortunately, there are protections in place to help ensure that employees won’t lose their pensions in the event that their employer is declared bankrupt.
How Will Your Pension Be Affected If Your Employer is Made Bankrupt?
The impact of an employer’s bankruptcy on your pension will vary depending on what type of pension you have. Workplace pensions are usually split into two categories:
- Defined contribution pension
- Defined benefit pension
Defined Contribution Pensions and Employer Bankruptcy
A defined contribution pension essentially means that your retirement savings are based on how much you and/or your employer contribute to the pension each month (and how much this ‘pot’ grows or diminishes via investments).
If your employer goes bankrupt, your defined contribution pension will be safe. This is because pension assets are not managed directly by the employer itself but are kept in a separate trust. So, if an employer is declared bankrupt, their creditors won’t be able to recoup their losses from funds held within the pension trust.
However, your employer won’t continue to make contributions towards your pension once they are declared bankrupt, which could affect how much pension you receive at retirement age.
Furthermore, your employer may have failed to make pension contributions in the months leading up to bankruptcy. If so, you can ask for compensation from the company or the National Insurance Fund to account for these missed contributions.
Defined Benefit Pensions and Employer Bankruptcy
Sometimes known as a ‘career average’ or ‘final salary’ pension, a defined benefit pension pays out a pension amount based on your earnings and the amount of time you’ve been with the company. So, what happens to pensions when a company goes bankrupt, and they are meant to provide you with a defined benefit pension?
These types of pensions are usually protected by the Pension Protection Fund (PPF). This is a government-backed fund that compensates individuals if an employer goes bankrupt and does not have sufficient funds to pay out its pensions. Alternatively, the company may have alternative insurance for its pension funds, in which case you will receive compensation via this cover.
However, if your employer is taken over by another company, they may take on the responsibility of providing you with your defined benefit pension. If so, you won’t receive compensation as the new company will still be providing you with the pension you expected to receive.
If you do receive defined benefit pension compensation because your employer is declared bankrupt, the amount you will receive depends on your age at the time of the bankruptcy.
If you are over the scheme’s usual retirement age at the time your employer declares bankruptcy, your pension will generally be paid in full. If you are under the scheme’s usual retirement age, you will typically receive a pension that is approximately 90% of the value of the defined benefit you were expected to receive.
Read More: Undischarged Bankrupt: What Does It Mean?
How Does an Employer’s Bankruptcy Affect You?
If your employer is made bankrupt, it can be an extremely worrying time for everyone involved. If you’re still working for the company (and expected to be working for them for the foreseeable future), you may have immediate concerns about finding alternative employment, for example.
However, one of the most important questions you can ask is, if a company goes bankrupt, what happens to pensions? People often spend years or decades contributing to a pension, so making sure your savings are protected should always be a top priority.
Fortunately, most people will find that they are either awarded their pension or are compensated fairly if their employer is made bankrupt. If you’re concerned about how an employer’s bankruptcy may affect your pension, it’s always advisable to get independent financial advice so you can protect your savings.
Understanding the Impact of Bankruptcy
‘Bankruptcy’ might be a term we hear often, but many people don’t have a full understanding of what bankruptcy really means or the impact it can have. While businesses can be declared bankrupt, individuals can be made bankrupt too.
Although bankruptcy may seem like a viable option if you’re in financial difficulties, it can have a long-term impact on your financial standing. Due to this, it’s important to fully understand the implications and make decisions accordingly. If you’ve been made bankrupt, for example, it may not be too late to have the bankruptcy annulled so that you can protect your financial status.
To find out more, contact Asset Solutions now on 0800 689 3861 or email us at admin@assetsoloutionsuk.com.
