Archive Website of the UK government

Pensions and risk

No savings, including pensions, are ever entirely risk-free. There are a number of controls in place to minimise the risks. This means your money is better protected.

There’s no perfect answer for where to put your money for later life. Each type of saving and investment works differently and has its own pros and cons. But for most people it’s better to do something, such as pay into a workplace pension, than do nothing.

There are two main types of workplace pension schemes: defined contribution and defined benefit pension schemes.

• Types of workplace pension schemes

Can the value of a pension go down as well as up over the years?

In defined contribution workplace pension schemes, your pension pot is determined by the contributions you and your employer make, and the performance of investments.

There are different types of investments and their values go up and down over time, such as shares. Over the long term these investments will usually give a better return than a savings account. Although investment values may fall, it is likely they will recover over the longer term.

As you get near to the normal retirement age for your pension, you can ask your pension provider to gradually move your money. They will move it to investments that have less chance of reducing in value in the short term. This is sometimes called ‘lifestyling’. Some pension schemes do this automatically. You can check with your provider if this will apply to your scheme.

In defined benefit workplace pension schemes the amount you get at retirement will depend on:

• how many years you were a member of the pension scheme
• your earnings
• the rate at which benefits build up under the rules of your scheme
  

What happens to your pension if your employer goes bust

If you have a defined contribution workplace pension, your pension pot is looked after by whoever runs your pension scheme. This is usually a pension provider, so if your employer goes bust you won’t lose your pension pot.

If a pension provider cannot pay, there are a number of organisations who might be able to help. For example, if the provider was authorised by the Financial Services Authority, the Financial Services Compensation Scheme (FSCS) can provide compensation. This will generally be because the provider has stopped trading and/or is unable to pay its debts. For more information visit the Financial Service Compensation Scheme website.

• The Financial Services Compensation Scheme Opens new window

If your defined contribution pension scheme is run by your employer (on a ‘trust’ basis) and they go bust, your pension pot might be smaller than it would have been. This is because, if your employer has been paying the pension scheme administration costs, they will no longer be doing so. These costs would now come from the scheme members’ pension pots.

This type of pension is known as a ‘Trust-based’ Defined Contribution workplace pension scheme. The other type (run by a pension provider) is known as a ‘Contract-based’ Defined Contribution workplace pension scheme. If you want to know which type of defined contribution pension scheme you are in, check with whoever runs your pension scheme.

If you have a defined benefit workplace pension, your employer is required to make sure their scheme has enough money to pay workers’ pensions.

The Pension Protection Fund was set up in April 2005 to protect you if your employer goes bust and the pension scheme does not have enough money to pay your promised pension.

For people who have reached their scheme’s pension age the Pension Protection Fund will generally pay 100 per cent compensation. For most people below the pension age, the Pension Protection Fund will generally pay 90 per cent compensation.

For more details on compensation visit the Pension Protection Fund website.

• Pension Protection Fund Opens new window

More useful links

• Saving for retirement

• What to do if your company pension scheme can't pay your pension

• What to do if your workplace pension scheme is closed or wound up