With interest rates at historic lows, many UK savers switch regularly between savings accounts to ensure that they are receiving the best possible savings interest rates. Why is it then that when 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 £3 billion 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 forget the fund they had built up with the company leaving it in the company’s trust 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 had 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 could either fill in a pension tracing form online through Direct Gov., or call the Pension Tracing Service on 03300 538 618.
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 would recommend that a defined benefit scheme stay where it is, unless the institution holding the funds was in financial trouble. This is because defined benefit schemes are a dying breed of gold-plated, blue chip pensions where your retirement income is guaranteed, inflation proofed and based on years of service rather than 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 would analyse how your funds were invested, and consider a number of factors, such as past performance, whether the investment strategy matched 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 since this would be easier for you to track, control and manage. This would also help you and your adviser keep a tighter rein on factors such as investment strategy and performance.
What about taking your money out in cash? This is only possible after you reach age 55, and even then only within limits. You should be able to take up to 25% of the fund you’ve built up as cash, and this is paid tax-free. The rest, whether taken as cash or income, would be 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 may have to rely on in years to come. Treat your pension fund with the care and respect that real money deserves.