Many people have enrolled into UK pension schemes when starting a new job, but have subsequently left and forgotten to combine the funds when switching to a new employer or perhaps they didn’t realise they needed to.
These inactive pensions are often named frozen pensions, or sometimes referred to as dormant pensions or preserved pension.
Definition of a Frozen or Dormant UK pension
In the UK, a frozen or dormant pensions usually refers to a workplace pension you have from previous employment, into which neither you or your ex-employer no longer make contributions.
How do they work?
Although you can no longer make contributions to these funds, the money in these schemes will continue to grow and you should continue to receive pension statements in the post.
Issues usually occur if you change address or the provider changes. Even if the funds are small you need to take action as without them you won’t be able to accurately calculate your retirement income.
You will gain full knowledge over all your savings and how they’re performing, and be aware of exactly what fees you’ll incur, and why.
How do I find dormant pension pots?
If you don’t have all of your previous records you could get in touch with the HR department at your previous place(s) of work, and they should be able to give you details of the company plan. However, it will be down to you to contact the pension provider and complete the process.
If you have multiple dormant pensions, you can use the government’s Pension Tracing Service. This free database lets you input the names of your former employers or pension providers, and generates the required information for you.
Do they earn interest?
Yes, however you are no longer able to contribute to a dormant pension, the funds in any dormant pension schemes may continue to grow over time, and you will be able to access it as normal provided you’re over the age of 55.
Frozen overseas pensions
If you’re a UK pensioner who has retired overseas in certain countries such as Australia, Canada, South Africa and New Zealand then your UK state pension will be frozen at the at the rate it was when you left the country, meaning payments will not rise in line with the cost of living.
What charges will I have to pay?
The likelihood is you will need to pay pension transfer charges to transfer any dormant pension. If you decide to consolidate your funds into one pot, you may be required to pay an exit fee to the dormant pension provider.
The exit fee will be deducted from the balance of your pension it can sometimes be a flat fee, but in some cases it will be taken as a percentage of the fund so the bigger your pot, the more it could potentially cost to transfer.
Before you transfer any dormant pension pots, make sure your are aware of exactly how much you’ll be charged and make sure there aren’t any restrictions.
Some older pension schemes, may have incurred charges as soon as you stopped making contributions to the pot. If you have a “with-profits policy” or previously invested in “with-profits funds”, you may also be subject to extra charges.
The charges you will incur vary considerably, both by provider and scheme.
What can you do with a frozen pension?
There are a few considerations:
Leave your “frozen” funds where they are
In some cases, leaving your dormant pension where it is may be the most sensible decision, this is especially the case with older final salary pension schemes which often had added benefits which you will lose with a pension transfer or if the funds are performing better or there are lower admin charges for the dormant schemes.
Consolidate all dormant funds into one account
Even if you’ve established the whereabouts of all of your dormant pensions and know how much you have in savings, you may decide that you’d prefer to consolidate the funds into one big pot.
You may choose to add any “frozen” funds to your private pension plan. In doing this you should be able to avoid paying multiple management fees, and a single pot can be a simpler way to manage your savings later in life.
Firstly remember to check if there are any exit penalties associated with the dormant accounts and whether you’ll miss out on any bonuses, and benefits.
Can you unlock a “frozen pension”?
If you’re aged 55 or over, and the scheme is a defined contribution, you can cash in your dormant pension.
You can access your “frozen” pension pots in the same way as you would any other pension; usually, you take out up to 25% tax-free, and any other withdrawals will be classed as taxable income. The exception is if the sum is very small, in which case you may be able to withdraw the full amount as a ‘trivial lump sum’, provided the scheme rules allow this. The total value of a member’s benefits (not just the defined benefits) cannot be more than £30,000.
Under separate small pots rules you may be able to take up to three small pots of £10,000 each from non-occupational schemes and an unlimited number from occupational schemes.
If your pension is a defined benefit scheme, you will not be able to access it until your normal retirement age, as outlined by the scheme. You may then be able to transfer it into another pension pot if you wish, or withdraw the guaranteed income.
Frozen Civil Service pensions
As mentioned, the rules and charges associated with withdrawing and transferring dormant pension funds vary from provider to provider, and scheme to scheme. There are also different processes associated with “frozen” Civil Service pensions.
If you’ve left the Civil Service and have not yet claimed your pension, you are classed as a deferred member. To access your funds you will need to request to claim your deferred member retirement application from the Civil Service Pensions.
Civil Service Pensions will then check the information supplied by your current employer, and send you a pension option and claim form to complete and return.
If your completed forms are returned at least one month before your retirement date, your lump sum (if applicable) should be paid shortly before you retire. Your pension will commence a month after your retirement date, and paid monthly in arrears.
What happens if I die?
If you die after leaving a pension scheme but before claiming your benefits, some schemes will only pay a refund of your own contributions, occasionally with added interest.
Others may provide life cover, perhaps in the form of a multiple of your pensionable earnings when you left the scheme, payable upon your death however, this is uncommon if you are no longer an active contributor.
A scheme pension may be payable to your beneficiaries, and the terms and conditions of the scheme will detail what funds are payable and who is classed as dependants. The amount payable will usually be based on a percentage of your pension entitlement. Any scheme pension payable is taxable regardless of when you die.