With interest rates at historic lows, many UK savers switch regularly between savings accounts to ensure that they are receiving the best possible rates. Why is it then that when it comes to money in an old pension plan, eyelids become heavy and money, sometimes significant amounts of it, gets left ignored and unloved? Your pension fund is real money and should be treated with exactly the same respect as money in your ISA or savings account.
According to This is Money, there is an estimated £3bn of unclaimed money in forgotten pension pots mostly in small amounts of less than £5,000. This happens when people work for companies for a short period of time, typically less than two years. Having joined the pension scheme, they would simply have forgotten the fund they had built up with the firm, leaving it in the company’s coffers when moving on to other employment.
Tracing a lost pension can be a bit of a nightmare and, according to the Pensions Advisory Service, “painfully slow” – particularly if the company you worked for has changed its name or merged with another firm. Your first port of call should be the Pension Tracing Service, which is completely free and government run. You can either fill in a pension tracing form online through Direct Gov or call the Pension Tracing Service on 0845 600 2537.
So what to do with your old pensions? Once traced, the first thing to do is to have them analysed by a fully qualified independent financial adviser. This will determine whether your pension is one of the highly valued defined benefit schemes, a money purchase arrangement or simply a group personal pension. In most circumstances, your adviser will recommend that a defined benefit scheme should stay where it is, unless the institution holding the funds is in financial trouble. This is because defined benefit schemes are a dying breed of pension, where your retirement income is based on years of service and not on investment fund performance.
You have a number of options if your old pension is money purchase or a personal pension. Before deciding on the best course of action, your independent financial adviser will analyse how your funds are invested and determine a number of factors, such as past performance, whether the investment strategy matches your attitude to risk and the charges within the contract.
Depending on the types of pensions you have, it may be appropriate to roll them all into one as this would be easier for you to track, control and manage. This will also help you and your adviser to keep a tighter rein on factors such as investment strategy and performance.
What about taking your money out in cash? This is only possible at the age 55 and, even then, only within limits. You should be able to take up to 25% of the fund you built up as cash, and this is paid tax-free. The rest would be taken as an income determined by the size of your fund and your age – and it is taxable.
The starting point for you is to sit down with someone who understands pensions and look at your options for all of your pensions, giving consideration to your age and potential retirement age, your current circumstances and your attitude to risk. This is real money we are talking about – money you will rely on in years to come. Treat your pension fund with the care and respect that real money deserves.