What Happens to My Pension If I’m Made Redundant?

Depending on the circumstances that surround it, redundancy can be a very uncomfortable situation, or it can be a gift. If this is a situation that has either happened, or it looks like it might happen to you, there are probably many questions that you have about the process and how it all works.

One of the most common areas that people think about, is what will happen to their pensions when they’re made redundant. In most cases, your pension will remain intact and under the same conditions and benefits as you had when you were working for the company. However, there are certain circumstances and certain types of pensions that could be impacted by a company making workers redundant.

In this article, we’ll explain how the main types of pension are treated on redundancy, and the options that you have to manage your pension going forward.

What Happens to Defined Contribution Workplace Pensions on Redundancy?

The most common type of workplace pension these days are what are known as defined contribution schemes. These types of pensions are ‘pots’ where contributions are made, the funds are invested and this can grow over the long term to retirement. These types of pension are very flexible and you as the pension holder have a lot of choice over what you do with the money.

Because they are flexible, it also means that they are quite separate from your employer. Generally, the pension will actually be run by a third party company, such as Royal London or Aviva.

One of the benefits of this is that the performance of your company isn’t tied to the performance of your pension scheme. If you are made redundant from your company, your pension will continue as normal. The funds will stay invested in the scheme, the money will continue to benefit from all of the tax concessions you get from a pension scheme, and you can access the money according to the pension rules when you retire.

What Happens to Defined Benefit or Final Salary Pensions on Redundancy?

Defined Benefit or Final Salary schemes can be in a slightly different situation. In many cases, the pension scheme and the payments it needs to make to its members, are a liability to the business itself. What this means is there can potentially be an impact on your pension, if your redundancy is part of a wider business problem. Let’s look at this a bit further.

If you are being made redundant as part of a restructuring of the department or through technological innovation or some other specific situation, and the company is financially secure, your Defined Benefit pension scheme will most likely be safe and will continue to accrue up until you reach retirement age.

The rules of the scheme will dictate how much it increases by each year, but there will be a factor of a percentage increase that will be guaranteed to be added on to your final pension amount on an annual basis. You will generally be able to get a projection from the company on what they expect your final pension amount to be.

On the other hand, if the company is in financial trouble and is making large numbers of their workforce redundant to try to save money, it could mean there are problems on the horizon for your pension. Essentially, if a company goes bankrupt, it may mean they aren’t able to pay their pension obligations anymore.

The good news is that you won’t simply lose everything you’ve accrued in your Final Salary pension scheme. Because there have been failed schemes in the past, the government has since set up what is called the Pension Protection Fund (PPF). This fund makes an assessment of the assets held by the pension fund, and arranges for either a buyout by another insurance company, or to take the scheme under the PPF itself.

Either way, members of the company scheme will retain retirement benefits once this process is complete. This is not to say it’s a seamless situation. The assessment period can take up to 2 years, and during this time no new benefits can be built up, and no transfers out can be made. Once the assessment is complete, sometimes the pension benefits will be reduced in order to ensure they are affordable going forward.

Can You Transfer Your Pension Once You’re Made Redundant?

If you have a Defined Contribution pension scheme, you have full flexibility over your pension. This means you can change investment options and withdraw funds flexibly, but it also means that you can transfer to another provider whenever you want to, including after you’ve been made redundant.

That’s not to say that it’s necessarily a good idea, because sometimes workplace pension schemes can have special features or benefits such as Guaranteed Minimum Pensions or Protected Tax Free cash. It’s important to check these sorts of things, and also to check the fees that you’re paying to make sure transferring is actually a good idea.

When it comes to Defined Benefit schemes, you can’t transfer the benefit to another Final Salary Scheme. So for example, if you were working for the NHS and were a member of the NHS Defined Benefit Pension Scheme, you couldn’t then transfer that to the Teachers Defined Benefit Pension Scheme if you became a teacher.

You can transfer a Defined Benefit scheme into a Defined Contribution scheme though. This is a very highly regulated area and it is almost always a bad idea to transfer, but it is something that you can seek professional advice on if you are interested. In fact, the government has made it mandatory that any Defined Benefit transfer over £30,000 must be as a result of the recommendation of a Regulated Financial Advisor.

Summary

Generally speaking, your pension benefits will remain intact if you’re made redundant. If you have a Defined Contribution scheme you will be able to leave the funds invested where they are until you retire, or you can transfer them to another provider, such as a workplace pension at a new job.

If you have a Defined Benefit scheme, the benefits will remain where they are and will increase each year in line with the rules of the scheme. If you're being made redundant because your company is in financial trouble, there is a chance the scheme could be either transferred to a new provider or into the Pension Protection Fund. This process can take up to 2 years and can result in a reduced level of benefits to the members of the scheme.