Keep on top of your old workplace pensions

One in eight people do not know how many old workplace pension pots they have, according to a poll by interactive investor (ii). It’s increasingly common for frequent job changers to lose touch with workplace pensions and the Department for Work and Pensions (DWP) estimates that the average person will have 11 pension plans throughout their career.

Lost pensions are particularly common among women, according to Kay Ingram, chartered financial planner at LEBC Group, because they may have had a long career gap and not kept in touch with a pension scheme or product provider after moving home and changing their surname. Last year the Association of British Insurers estimated that there were over £19.4bn of pension assets unclaimed in the UK, largely because of people forgetting to notify their pension provider when they move house.

Since pension auto enrolment was introduced in 2012, the number of stranded pension pots has been increasing. Rebecca O’Connor, head of pensions and savings at ii, says this is particularly a problem among young people who have been auto enrolled in jobs they only stay at for a year or two. Unless people in workplace pension schemes make an active decision to take their pensions with them, they will become a ‘lost pot’ until they are transferred. 

Currently, enrolment is automatic for people aged 22 or over earning a minimum of £10,000 from a single job. The minimum total auto-enrolment is 8 per cent of your gross salary, with employers making up at least 3 per cent. Even if a pot is small, the compounding effect of investment returns over multiple decades can have a staggering impact on the value of small pots. £5,000, for example, would be worth £16,217 after 30 years, if it grew at a compound annual rate of 4 per cent per year.

How to recover lost a lost pension

If you’ve lost track of your pension pots, it should be fairly straightforward to consolidate them. The government has a Pension Tracing Service you can use, provided you can give them your National Insurance Number and either the name of your employer from the time the pension was being paid into or the name of your pension provider when it was opened. The service covers both workplace pensions (set up by your employer) and personal pensions (set up by you).

The Pension Tracing Service will only tell you the contact details of the pension’s administrator. You will then need to contact the pension administrator to find out whether you have a pension, what value it is and to ask for it to be paid out.

If your previous employer still exists, it might be faster to contact their human resources department and ask them to provide the details of your pension administrator. You can then email, call or write to the provider and ask them to transfer the pot into your self-invested personal pension, if you so wish.

A common source of dormant pension accounts is where the pot was opened with companies no longer on the market, such as Abbey Life, Allied Dunbar, Equitable Life and London Life. If you had a pot with a pension administrator that no longer exists, you can visit the Association of British Insurers website (abi.org.uk) to find out where your pot is now administered.  

If you are a member of a defined benefit pension scheme with a company that has gone bankrupt, the Pension Protection Fund, which sits within the DWP, will pay most or all of your pension entitlement when you reach retirement age. If you have already retired, you will usually be paid your full pension amount, and those who have not yet reached retirement age will get 90 per cent, rising in line with inflation each year (up to a maximum of 2.5 per cent). 

Consider consolidating

Consolidating your defined contribution pensions can lead to lower overall charges, especially if you have older plans, which tend to have fairly high charges. It can also make it easier to invest in appropriate assets and to administer and review your pension.

However, there are instances where consolidating your pension might not make sense, although you should keep a record of all of your pots. If you are in a defined benefit or hybrid pension scheme it is almost never worth transferring out of the scheme, apart from in exceptional circumstances, as the income they provide tends to be much more attractive than the cash lump-sum equivalent. Some older schemes also charge additional fees or levy penalties on transfer of the funds, which can sometimes outweigh the advantages of consolidation.

Ms Ingram notes that pension pots under £10,000 can be worth holding on to. Where an individual has total pension values near or above the lifetime allowance for pension savings (£1,073,100 in 2020-21) they may have to pay the lifetime allowance charge. 

Your pension pot will be tested against the lifetime allowance when certain events occur, such as taking money out of the pension, reaching age 75 or on death prior to 75. Up to three pots under £10,000 may be cashed in without counting towards the lifetime allowance, providing the individual has some lifetime allowance left.  

Similarly, small pots (under £10,000) can be cashed in entirely without triggering the Money Purchase Annual Allowance, which restricts future pension savings allowances to £4,000 per year instead of up to £40,000. This restriction on future pension savings applies where more than the tax-free cash sum of 25 per cent is withdrawn on a flexible basis from larger pensions. 

Pension succession planning

To ensure your pension passes to your beneficiaries as easily as possible when you die, assuming you have a defined contribution scheme, it is important to fill out an ‘expression of wishes’ form with your pension provider. Ms O’Connor says lots of people do not fill out the form, which makes it much harder to hand the money to your beneficiaries. “I don’t think people are aware of how important that form is. It’s almost like another piece of paper to fill out and people don’t do it,” she explains. 

It is also important to make sure you keep the form updated, as who you chose as a beneficiary is likely to change over the course of your life, and their details on the form need to be current. If you have not filled out the form, your provider will track down who to give to the pot to, but it will take longer. 

Defined contribution pension schemes are a tax-efficient way to pass on money as they are not subject to inheritance tax when you die. If you die before the age of 75, the person (or people) who inherit your pot can draw on the money as they wish without paying any income tax. However, if you are 75 or over when you die, a beneficiary of your pension pot will have to pay income tax on any withdrawals at their marginal rate (ie, the highest rate of income tax that they pay).