Although it is not possible to pay into a frozen pension plan the fund should continue to grow. The issue is how much growth? Is the fund performing at or around standard industry benchmarks? Are the charges reasonable? If not it may be best to consider a transfer to a different pension plan.
One piece of analysis from Hargreaves Lansdowne between June 2008 and June 2013 perhaps illustrates the problem. It showed the best defined contribution pension scheme (based on £200 / month contributions) would generate a pension fund of £332,604, the worst would generate £57,459.
What Is An Underperforming Frozen Pension Plan
Any money purchase pension scheme, be it a private or company scheme, will deliver a final pension fund value dependent on the following key factors:
- The number of contributions that you make.
- The length of time your contributions are invested.
- Investment growth over the time period.
- The level of charges.
Up until the point, you left an employer and your pension was “frozen” you controlled the first two, but the last two points were outside your immediate control.
So how do you recognise an underperforming pension? Of course, there are a wide number of factors to consider and individual circumstances vary widely but if a frozen pension plan is currently failing to achieve 5% growth per year then further investigation may be appropriate.
What are appropriate levels of charges? These can vary widely but if they are higher than 1.9% of the fund value per year then further investigation may be necessary. If they are higher than 2.75% then the impact on your frozen pension plan at retirement will be significant.
It is important to take a view over at least 2 – 3 years. Has a fund failed to perform consistently or are there perhaps valid reasons for a poor growth in one year compared to others? Is there a reason for higher than expected charges and can this be justified? Of course, this analysis assumes you have the latest statement to hand. If not you may ask your Financial Adviser to locate and review your paid up (Frozen) pension plans. Alternatively, you can find details of pension scheme administrators at “>https://www.gov.uk/find>-lost-pension> or >https://www.find>mylostpension.com/.
If your (or your Advisers) analysis shows your frozen pension fund is performing below expectations then there are many alternative pension schemes to consider. An increasingly popular choice is a Self Invested Personal Pension (SIPP).
What Is A SIPP
A Self Invested Pension Plan (SIPP) allows the pension holder to select and manage investments into the plan. SIPP’s are money purchase schemes that allow you to invest in a wide range of investments rather than rely on a pension funds managers to make investments on your behalf.
SIPP’s stay with you if you move jobs or stop working and, unlike traditional direct contribution schemes, you can keep making contributions. Many employers will also be prepared to contribute to well established SIPP funds although they are under no obligation to do so.
SIPP Charges vary widely between providers and typically include an annual charge (admin fee), a fee for every share or fund transaction and a fund manager charge. Some providers have other charges so you need to be sure you are aware of all potential costs.
SIPP Benefits and Risks
The benefits of SIPP’s are:
- They are mobile (they stay with you if you move jobs).
- Their flexibility (the types of investments they will accept).
- Control (you are in complete control of your pension fund).
The key issue to consider however is the potential return on investment they offer compared to your frozen pension plan.
It is also important to consider the risks, specifically:
- What is the overall level of charges compared to your existing paid up scheme.
- Management time / expertise. Unlike your paid up pension scheme you are in charge of your investments. Investments can go down as well as up and mistakes can be extremely costly.
- Understand any guaranteed benefits your existing paid up pension plan may offer. If these benefits do exist it is important to carefully weigh the impact of under performance over the remaining term of the pension against the value these benefits offer.
- There may be significant charges imposed to exit your frozen pension scheme. These must be considered when making the comparison between a SIPP and your frozen pension scheme.
The Tax Position On A Frozen Pension Plan
Before taking any decisions it is important to fully understand the tax position. At the point of transfer into the SIPP, you can take 25% of the frozen pension fund value free of tax. The balance, when removed from your SIPP, will be taxed at whatever your normal tax rates apply at the time. Of, course the option to take a tax free sum is only available to those over 55 years of age.
It is important to carefully consider the benefits offered by your existing frozen pension plan and its performance against industry norms. A transfer into an alternative scheme may be the best way forward but mistakes can be costly. Should you wish to talk through your options then please do not hesitate to give us a call on 0800 043 8341 or Email us on firstname.lastname@example.org. Alternatively, complete the contact form below, enter a convenient time in the comments box and we will call you. We are authorised and regulated by the Financial Conduct Authority (FCA) and operate UK wide.