According to an Association of Accounting Technicians, 2015 survey the average individual will work for six different employers in their lifetime. Many of those employers will offer a workplace pension scheme. The question is what happens to that frozen pension plan when an individual moves on?
Pensions are paid up (frozen) at the point an individual leaves their employer. It should be no surprise therefore that many people hold at least one frozen pension.
The following applies to defined contribution schemes. There are additional complexities for those with defined benefit (final salary) pensions.
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 fees and charges reasonable?
If your (or your Advisers) analysis shows your frozen pension fund is performing below expectations there are several alternative pension options to consider. An increasingly popular choice is a Self Invested Personal Pension (SIPP).
What Is An Underperforming Frozen Pension Plan
First a clarification of terminology. The term “frozen” is widely used but it is not in fact correct. The term has arisen because no further payments can be made into the pension scheme and it is “frozen” until retirement age. The correct terminology is either a deferred pension or a paid up pension.
A defined contribution pension scheme will deliver a final pension fund value dependent on the following key factors:
- The number of contributions made.
- The length of time contributions are invested.
- Investment growth over the time period.
- The level of charges.
So how do you recognise an underperforming pension? Of course, there are a wide number of factors to consider and individual circumstances vary widely. As a general guide 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? Again, these can vary but if they are higher than 1.9% of the fund value per year then further analysis may be necessary. The level of fees applied (particularly for pensions set up 10 years or more ago) can have a serious impact on the value of a pension fund at retirement.
It is important to take a view over at least 2 to 3 years. Has a fund failed to perform consistently or are there 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?
If either growth or fees (or both) are an area of concern it may be worth considering transferring a frozen pension to a different provider. In most cases, this may be actioned at any time although no withdrawals from a fund may be considered until an individual is over 55 years of age.
A transfer is not the best option in all circumstances. It is vitally important to check any benefits offered by your existing scheme (such as a guaranteed annuity), annual charges, exit charges, current growth rate and investment portfolio. These should be compared with whatever an alternative pension plan may offer.
There are a bewildering array of personal pension plans available. A SIPP is not the only choice available.
What Is A SIPP
A Self Invested Pension Plan (SIPP) delivers a high degree of control over how an individual’s pension scheme is managed. SIPP’s allows the pension holder to invest in a wide range of investments. They deliver a high level of control.
A SIPP must be managed appropriately and can have high fees and charges. We discussed choosing the right SIPP, the benefits and risks in detail in an earlier post you may read here.
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.
SIPP’s stay with you if you move jobs or stop working and, unlike traditional direct contribution schemes, you can keep making contributions. A SIPP delivers control over how much you contribute or withdraw (once you reach the 55 years of age) from the pension plan. Many employers may decide to contribute to well established SIPP funds although they are under no obligation to do so.
SIPP Charges vary widely between providers and often include an annual charge (admin fee), a fee for every share or fund transaction and a fund manager charge. Other charges may apply so it is important to establish all potential costs.
The Tax Position On A Frozen Pension Plan
Before taking any decisions it is important to 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 withdrawn from your SIPP, will be taxed at whatever your normal tax rate may be at the time.
Of, course the option to take a tax free sum is only available to those over 55 years of age. This is a complex subject and it is best to engage an Independent Financial Adviser to consider the tax implications and advise or your best way forward.
Should you wish to talk through your frozen pension options then please do not hesitate to give us a call on 0800 043 8341 or Email us on email@example.com. 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.
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance. This blog is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investment or course of action. The information in this article does not constitute financial or other professional advice.