How Safe Is Your Pension?

Savings are protected by the Financial Services Compensation Scheme, but what about pensions, insurance policies and investments? What happens if your provider collapses? Jane Baker finds out.

There's been a lot of talk about the Financial Services Compensation Scheme (FSCS) lately. That's hardly surprising given the troubles facing the UK banking system.

Of course, savers want to know how safe their money is if their bank collapsed. The FSCS protects savings up to a maximum of £35,000 if the bank in question goes bust. (Find out more about how the FSCS protects savings here.)

But the scheme doesn't stop there. If you're beginning to wonder how other financial products are protected, you'll be glad to know compensation can also be given for insurance policies and investments  too.

In all cases, the following three things must apply before the FSCS can step in:

• You must have suffered financial loss.
• The firm in question must be authorised by the Financial Services Authority (FSA).
• The firm must be in default which means it's unable, or likely to be unable, to pay claims against.

If the firm is still trading, claims for compensation should be directed to the Financial Ombudsman Service (FOS).

With these things in mind, let's look at each product in turn and the protection the FSCS could provide. We'll kick-off with long-term insurance and pensions.

Long-term insurance and pensions

This covers products such as pensions, annuities, endowments and life insurance.

If an insurer were to go into default, the maximum protection the FSCS could provide is 100% of the first £2,000 plus 90% of the remainder of the claim. There is no upper limit on the amount of compensation that could be paid.

Here's an example of how a claim for compensation under the FSCS could work in practice. Remember each claim will be dealt with on a case by case basis.

Let's say you have been making contributions for a pensions policy, but your provider has gone bust. You, of course, would want to make a claim for financial loss. If the pension provider is unable to meet your claim because it has insufficient assets -- and you can't be compensated by any other means -- then you can turn to the FSCS for help.

What will the FSCS do?

First of all, the FSCS would try to arrange for the pension you had with the failed provider to continue in one of two ways:

1. This could be achieved by transferring your pension to another provider, or

2. By substituting your original pension with one offered by an alternative provider.

Whichever route is used, the FSCS will ensure you receive at least 90% of your pension pot. The pot's value would be determined by a court.

Alternatively, the scheme could instead provide funds to return the contributions you have made for your pension where appropriate.

General insurance

This includes compulsory insurances such as motor insurance and non-compulsory insurances such as home insurance.

Compulsory insurances are protected if full so you would be entitled to 100% of your claim. For non-compulsory insurances, the maximum compensation is 100% of the £2,000, plus 90% of the remainder.

The FSCS would take the same action as it does for long-term insurance policies and pensions. You also have a right to claim compensation for financial loss against an insurance broker which has stopped trading or `disappeared'.

General insurance advice

This only applies where general insurance policies have been arranged by an adviser firm on or after 14 January 2005. The compensation limits are the same as general insurance.

Here are a couple of examples when there may grounds to claim:

• If the firm had not yet placed cover with an insurer before its date of default, you could be entitled to a return of your premiums or payment of a claim if one was outstanding at the time.
• If the firm places insufficient cover for you, or fails to tell you about a relevant exclusion which causes the insurer to reject your claim.

Investments

This includes products such as stocks & shares, unit trusts and futures & options. The maximum compensation under the FSCS is £48,000 per person, where 100% of the first £30,000 is protected and 90% of the next £20,000. 

The FSCS states that, for your investment claim to be successful, it must meet all of the following criteria:

• You must have lost money as a result of receiving bad advice to buy an investment, poor investment management or misrepresentation.
• The advice to buy an investment must have been given to you on or after 28 August 1988.
• The firm that advised you must have been authorised by an appropriate regulator at the time.
• The firm you have made a claim against has insufficient assets to pay you compensation.

So, to sum up, you are only protected if you made the investment in the last 20 years following advice from an authorised investment advisor.

In practice, the compensation the FSCS would pay aims to put you back in the same financial position had you not invested. The scheme may also add a `rate of return' to your compensation award. This takes account of the interest -- or some other rate of return -- which you have lost the opportunity to earn on your money over the period of investment.

That covers most of the FSCS's remit. You can see the scheme is pretty wide-reaching and protects far more than just your savings. But it's important to know your rights and the limitations on compensation.

More: A Stronger Safety-Net For Savers