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Should you consolidate old pension plans?

Photo of Mark Meldon, Independent Financial Advisor

The following guest post is by Mark Meldon, an independent financial advisor. Occasionally Mark volunteers to explain an obscure corner of personal finance.

Now seems an opportune time to return to a long-standing bugbear of mine, the £250bn of pension pots languishing in what are known as ‘Zombie’ life offices.

That’s because the Financial Conduct Authority (FCA) released a number of interesting papers back in July. These were mainly concerned with the thorny issues of defined benefit transfers and how pension funds should be invested, but one looking at non-workplace pensions particularly caught my eye.

What is a ‘non-workplace’ pension?

I suppose I could say “something that a financial adviser flogged you when you were young”, but that isn’t entirely fair.

What we are talking about here are things like Stakeholder Pensions, Personal Pensions, SIPPs, and ancient (but very interesting) vehicles like Free-Standing AVCs, Section 32 Buy-Out Bonds, and Retirement Annuity Contracts.

These things came into being from 1956 in the case of retirement annuity contracts and 2001 as far as Stakeholder Pensions are concerned.

The numbers

According to the FCA data, an amazing £470bn is currently held in these obsolete policies; rather more than the £370bn held in all non-final salary company pension schemes!

Apparently, there are 12.7m of these policies – I like to call them ‘accounts’ – and the FCA paper confirms that 89% of these individual pensions are held by firms that are closed to new business. That’s nearly 70% of the total in these Zombie firms.

The FCA say that there are around 8m accounts worth £250bn in the hands of the Zombies.

Reasons to consolidate

I take the view that if you have an account like this it would be very sensible to consider your options. It is unlikely that these old plans will ever offer full digital access. They often have terrible service, and there is no competitive pressure to produce good investment returns in order to attract new business.

If you were, after suitable analysis, to transfer to a modern pension plan, you are likely to gain the following advantages:

  • Simplicity – always a good thing
  • Lower charges – nearly always
  • Better service – it’s true!
  • Enhanced flexibility – old plans rarely offer ‘flexi-access drawdown’ for example
  • A wider investment choice – including index funds

The FCA points out that older and smaller pots bear disproportionately higher charges – quelle surprise!

It is my experience that clients who do consolidate often gain a double benefit by doing so as they end up with one larger account held in a modern, lower-cost and better invested arrangement – and there really are some excellent choices for consumers out there nowadays.

Other benefits that can be gained by consolidating include the automatic re-balancing of your investment fund, surety regarding death benefit nomination forms, and the option to self-invest through a SIPP.

As the FCA says, clients who have consolidated – about half of those who did so shortly after the introductions of the Pension Freedoms in 2015 – did so to access features that were simply not available from their old account. Things like flexi-access drawdown, the uncrystallised funds pension lump sum, and the automatic phased payment of tax-free cash.

There is always a ‘but’

Although I’m rather bullish on the benefits of pension account consolidation, there are several important things to be carefully considered prior to your taking any action.

A good IFA can certainly add value here, as they can draw upon their experience with looking under the bonnet of old accounts – a slow, but fascinating (I know, it’s sad) exercise.

Exit penalties

The FCA says that exit penalties are becoming rare, with 84% of personal pensions having no such penalties.

For the rest, the FCA acted in 2017 which meant pension firms were no longer allowed to impose an exit charge of more than 1% on any contract-based defined contribution scheme.

If the exit charge happened to be less than 1% at the time, the charge could not be increased, either.

In October 2017, the Department of Work and Pensions extended the FCA exit charge regime to occupational defined contribution schemes.

So, exit charges are much less of a problem that they were before 2017, but they still need to be established.

Guaranteed pensions

This is much more interesting.

Back in the 1970s and 1980s, inflation and interest rates were much higher that they are today. Up until 2015, most people bought an annuity with their pension account after drawing their tax-free cash – many sensibly still do – and the rate they got was determined by the prevailing yield on 15-year government stock and the longevity statistics.

Thus annuity rates were, nominally at least, higher than they are today.

As a marketing gimmick designed to attract new business, many life insurance companies also offered a minimum level of income based on your age when you drew your benefit – a so-called ‘guaranteed annuity rate’ (GAR).

At the time, these were at below market rates and were seen as a kind of insurance. (Don’t ask former Equitable Life account holders about this, by the way, as you might get your head bitten off!)

Then the Great Financial Crisis of 2008 happened and one significant consequence of this was the collapse in annuity rates, making those old “they’ll never use them, anyway” GARs suddenly very attractive and expensive for the life offices to honour. (The FCA has insisted on adequate reserves).

Earlier this year, I helped a 60-year-old plumber from Wiltshire set up a GAR he had with Scottish Widows. His £98,500 fund is paying him £6,900 per annum, in monthly installments, fixed for the rest of his life. That’s equivalent to a rate of about 7%, nearly double what he would have obtained on today’s open market.

Good for him, bad for Scottish Widows.

I have often seen GARs of 10%, which is around twice the going rate for a healthy person today. I recall that the highest I have seen was 16% at age 60 from an old Equity & Law executive pension plan.

Marvelous – or is it?

The big downside is that many GARs are inflexible – they might only apply annually in arrears, for example. They might not be able to include a spouse’s pension – which was why life insurance was nearly always arranged at the same time as a retirement annuity all those years ago – and they will generally be fixed in payment.

Often, it’s use it or lose it, too. If you don’t take you GAR on your 65th birthday, for instance, it’s gone.

So, using the GAR isn’t always the right choice. It very much depends on your circumstances.

It is, however, potentially a very valuable thing, a GAR, and it should not be given up lightly. Yet recent FCA figures show that something like three in five of over-55s are not taking up the GAR from their pension account.

There are all sorts of reasons for this, I suspect, but two-thirds of these people merely cash out.

Anecdotally, many people have cashed out and put the money in their bank. Why would you abandon the tax-exempt pension wrapper like this?

Protected tax-free cash

This is, perhaps, an odd one, but is something I have come across quite often, particularly for those individuals who were in defined contribution occupational schemes in the past.

If you built up benefits before 2006 you might be entitled to a tax-free cash lump sum above the normal 25%. The highest I have dealt with was 83%!

In most cases, if you transfer to a new account, this ‘protected’ tax-free cash will be lost, unless you have somehow managed to ‘buddy up’ with someone and are able to undertake a ‘block transfer’.

Block transfers are hard to do – I have never done one – and don’t apply to accounts like S32 Buy-Out arrangements. HMRC and the FCA need to simplify this.


If you have old pension accounts, dust them off and review them. For most people who are employed, it’s worth looking at your Workplace Pension first as these usually have very low charges and the process of consolidation is straightforward and inexpensive.

Otherwise, you might like to chat to an IFA about your options. These are either a decent modern personal pension from a life office or, if you fancy being rather more involved with your pension account, a SIPP.

To conclude: A case study

Earlier this year, I met with a lady who had set up a personal pension in 1997 with what was then called Skandia Life, into which a regular payment of £100 was being paid.

The fund, invested in a range of higher-risk actively managed funds, had accumulated to just under £74,000 on contributions of about £35,500.

Not too bad, but there was a problem in that the old account was costing an eye-watering 2.16% per annum in charges – excluding the 2.5% of each contribution still being paid in commission to the original adviser.

I recommended de-risking the way in which her account should be invested – as the time until her retirement was quite short – and that the fund be moved to a modern Pension Portfolio plan with the excellent Royal London.

The new plan is invested in a Flexible Lifestyle Strategy, and has a management charge of just 0.45% – a huge saving on before. The new plan offers all the flexibility she needs going forward, unlike the old one.

The cost to change was modest at about £1,000, and this agreed fee, to cover my time and research and establishment costs, was deducted from her tax-exempt pension fund.

The automatic rebalancing and portfolio adjustment undertaken by Royal London periodically should prove helpful, too, and Royal London’s expense deductions drop if the fund grows.

Mark Meldon is an Independent Financial Advisor based in Cheddar, Somerset. If you need an IFA closer to home, try the directory at Unbiased. You can also read Mark’s other articles on Monevator.

{ 22 comments… add one }
  • 1 Mr Optimistic September 6, 2019, 8:14 am

    I had two pensions with GARs, an old GMP deferred pension and a Section 32 buy out with Equitable. They were very lucrative in terms of returns giving 8% pa. However changes by the government in the past meant they offered no spouses pension and zero uplift against inflation. Shouldn’t complain but not ideal. When I tried to talk to the providers to see if there was scope for negotiation and trade off I got nowhere. Equitable were particularly reluctant even to talk. In the end I just let them mature into annuities. All the talk about open market options and enhanced annuities got nowhere. An IFA may have done better but the amounts were relatively small.

  • 2 Mark Reynolds September 6, 2019, 8:18 am

    Hi Mark,

    I think that this overview of old pension plans will be useful for many people moving into a preretirement phase.

    My wife and I consolidated our pensions around years ago tracking some down through the government pension tracing service.

    One thing that we were not able to trace is any AVCs that we contributed to in the 80s/90s. We are both pretty sure that we topped up various DC pensions using AVCs which may have been free standing AVCs. These did not show up when we traced the various company pensions.

    Is there any way to know if these AVCs exist anywhere or if they have been rolled up into the DC pension total so don’t exist independently?

    If they do exist, should we be able to find them using the pension tracing service?

    At the moment our only plan is to wait and see if they turn up when we reach retirement age. Is there anything else that we can reasonably do to resolve the question of whether these AVCs still exist or not?

    Thanks for any help.

  • 3 Simon September 6, 2019, 10:21 am

    I agree about the pre retirement phase.
    I have 3 old DC plans (one with a small GMP underpin) and 1 current DC plan
    I plan to retire next year in November with an IFA putting them into one of their portfolios (depending on my risk profile).
    The charges in future are obviously a bit more than my current charges on my DC plans (some of them have no platform charges, to me at least, just the AMCs which are quite low). They are obviously not all of the market funds but for my circumstances 90% of them are in cash (I am moving abroad and want to take the maximum amount of TFLS so it is not taxed overseas, and there is just too much volatility for me to see if next year will actually go up)
    I plan to start moving to his portfolios in March next year. Some of the transfers I have heard about can take up to 9 months, with 3-4 months being the norm. The SLA on answering queries from the Company DC providers is 7 days PER EMAIL!
    Thus I will start the process 6-9 months before I retire for the old DC plans
    The current DC plan – because I am still contributing I will transfer that when I leave employment.

  • 4 Money Mountaineer September 6, 2019, 11:05 am

    Thanks Mr Meldon, this article is the kick up the proverbial that I needed to give my pensions a spring clean.

    I’m most likely in a decent place given I only have 2 DC pension (and two very small DBs), both relatively modern and with major/modern providers; so for me it’s probably just a matter of a double check that I can’t optimise costs anywhere. But more broadly – I must admit, despite my degree level numeracy and personal finance hobbyism, pensions has always been the area that I’ve found most confusing and intimidating. Someone once gave me the general advice that, ‘if you save 10% a year, and don’t take extreme/zero risk with your fund choices, you won’t go hungry in retirement’. And having always been lucky to have good employer matches and managed nearer 15% saving, I’ve always left it at that. But as my pension pot has grown, and as a result of your article, I now realise this is an area I need to understand better and take some responsibility for.

    Step one: understand the fees my providers are applying. Sadly not as easy as I had hoped at first glance. I’ve logged onto both of my accounts; and the costs haven’t exactly jumped out at me and shouted ‘boo’. But I’m determined… I’m going to get to the bottom of this now, before I spend another 10 years plowing money into something I don’t understand.

    Thanks for the motivation.

  • 5 Richard September 6, 2019, 11:25 am

    Wow, that lady you helped must have been at risk of a shrinking pension. Costs on 74k @ 2.16 is 1,598. Contributions are 1,170. So need 0.6% growth just to stand still (ignoring inflation) and 2% to stand still covering the costs. In low return environment, the risk is very real. Looks like 1k well spent there!

  • 6 Simon September 6, 2019, 11:30 am

    @money mountaineer like you I am probably new to the understanding pensions game, although I have been had my funds investing in them since 1986. I am wising up very rapidly through this blog and MSE as the countdown to early retirement comes very very quickly.
    In my DC section I can see the fund factsheets, I can also see on top this the monthly transaction charges in the transactions section of the portal. It just so happens only one of my DC funds charges a monthly transaction fee (thanks Atos Origin) the others must be company subsidised
    Here is a fact sheet from an active fund I am invested in (it’s a punt with 5% invested since last year and has gone up 17.5% inc charges)
    You can see the charges on the left, these are included inside the unit price.
    May be if use, perhaps a bit simple for most of the people here

  • 7 Mark Meldon September 6, 2019, 11:40 am

    @Mark Reynolds.
    The AVC’s are almost certainly bundled up with the old schemes; the administrators should be able to tell you. In-house AVC’s were generally ‘cheap to keep’ and were either ‘added years’, thus augmenting the DB pension or, more likely, ‘money purchase’ operated by a life office. Way back then, firms like Prudential and Norwich Union (Aviva) were big participants. If FSAVC’s they will be with a life office.

    Without knowing full details, it might be that your current workplace pension offers the best option, but your IFA will answer that point. That’s because the employer and their advisers should have negotiated special terms with the provider which boils down to ultra-low charges. I just looked at a DC occupational scheme with L&G that only charges 0.29% per annum. Beware, too, of ‘stranding’ the pots in the UK if you go overseas permanently. I have clients who moved to the USA a few years ago and the tax charges on moving UK pensions to their new abode are, they tell me, punitive. It might be better to set up UK pensions before you go, depending on how old you are.

  • 8 Mark Meldon September 6, 2019, 11:45 am

    @Money Mountaineer,
    It is very likely that you DC scheme, whoever it is with, has entirely reasonable charges, certainly compared to most private arrangements. Clearly, employers and their advisers can negotiate attractive charges, and fund options such as ‘Lifestyling’, because of the big sums involved.

    Remember, though, as with all DC schemes, YOU bear all of the capital risk! If only the Thatcher government hadn’t introduced ‘contribution holidays’ for DB schemes all those years ago, most employees might still be in decent ‘final salary’ schemes – hey. ho!

  • 9 Simon September 6, 2019, 11:45 am

    @Mark Meldon
    Thanks for the reply, none of my DC pots offers drawdown and I have used, trust and like my IFA from before
    I am keeping the pots in the UK but looking at low tax or zero tax countries to take drawdown from .

  • 10 Money Mountaineer September 6, 2019, 12:05 pm

    @ Mark Meldon, @ Simon,

    Thanks for the feedback – you’re right, company DC schemes with Aviva and Prudential, all started in the past 13 years are all likely to be ‘fine’. But, as things start to get a bit more ‘real’ as my FIRE target date starts to look more 5-10 years away than the far distant future, this is definitely an area I need to be more educated and confident with; even if the best action to take is a calm and composed, ‘do nothing, don’t fiddle’.

    Cheers, MoMo

  • 11 Factor September 6, 2019, 12:10 pm

    For those who may not know, AVC = additional voluntary contribution, and FSAVC = free-standing additional voluntary contribution.

    To pay the household bills for the six months between leaving employment and starting my own business, I actually worked as a salesman for a life office (long since subsumed) on a commission-only basis (no salary) and sold several AVCs amongst other things, all of the AVCs being to teachers as it happened, each client recommending me to the next.

  • 12 Matt September 6, 2019, 12:30 pm

    Hi Mark
    There was an article about this on ftadvisor which included a disadvantage that you didn’t mention (admittedly I didn’t completely understand it):
    “savers are allowed to take up to three ‘trivial’ pots of under £10,000 without them counting against the lifetime allowance”.

  • 13 Mark Meldon September 6, 2019, 12:38 pm

    Yes, that’s true about ‘small pots’, but my main intention was to think more about the ‘accumulation’ stage here rather than the rather more thorny issue of ‘decumulation’ about which I have written before. There is also ‘serious ill-health’ commutation, too. That’s where your medical advisers say ‘have you made a will’ – you can ‘cash-in’ all of your pension funds; whether that’s a good idea depends on the individual’s circumstances, but its a rare thing.

  • 14 Matt September 6, 2019, 12:42 pm

    Thanks for your speedy response. If small sub-10k pots could be an advantage, shouldn’t we consider this before consolidating them during the accumulation phase?

  • 15 Mark Meldon September 6, 2019, 12:44 pm

    I must mention that some old pension plans might have ‘rider benefits’ like life insurance and ‘waiver of premium’, features not generally available nowadays. In certain situations these features can be useful, if you die or become incapacitated. To cover absolutely everything would mean a very long article indeed.
    In essence, I think people need to look at charges and the investment choices available and then weigh up the pros and cons of holding or folding.

  • 16 Mark Meldon September 6, 2019, 12:50 pm

    @ Matt,
    Yes, but how many people actually have DC pots (or combined DB/DC pots) above the Lifetime Allowance? Sure, the numbers are increasing, but the majority of funds I see are well-within the allowances. Mind you, I have met a handful of people who have inadvertently triggered the Money Purchase Annual Allowance, thus reducing their funding opportunity by 90% much to their chagrin!

  • 17 Mark Meldon September 6, 2019, 12:51 pm

    Might that have been Commercial Union?

  • 18 Mr Optimistic September 6, 2019, 12:58 pm

    The point has probably been made, but for those with avcs attached to a dB scheme, moving the avc will break the link and be disadvantageous wrt the commencement lump sum ( tax free withdrawal).

  • 19 Factor September 6, 2019, 1:34 pm

    @Mark Meldon

    A D actually, with the other salesmen there as motely a crew as ever you’ll see!

  • 20 Peter September 6, 2019, 5:42 pm

    > how many people actually have DC pots (or combined DB/DC pots) above the Lifetime Allowance

    Around 820k with over 3 years to age 55 …. I will probably remain below the lifetime limit unless the politicians mess it all about.

  • 21 Moneydog September 7, 2019, 5:27 am

    Re: transferring UK pensions to USA. It’s my understanding this is essentially not possible. HMRC will only transfer out to a so-called QROPS (qualifying recognised overseas pension scheme). There are no publicly available pension schemes in the US that you can transfer in from a UK pension. You’re basically stuck with it until retirement age (I have seen schemes in which you transfer out to 3rd countries like Malta to circumvent this, but I haven’t investigated this option very deeply – I’d suggest much caution to anyone considering that route).

    For those planning on moving abroad, search for the “QROPS list” to investigate options for your destination country. At least for the US, the dual taxation treaty may protect you if you transfer your UK pension to another UK pension pot while tax resident in the US. However, UK financial providers (of any kind) seem reluctant to open new accounts if you’re not UK resident, so I’m not sure how easy this is in practice.

  • 22 RichJohn1120 September 7, 2019, 9:18 pm

    Hi Mark

    A very interesting topic, very close to my heart due to the fact that I have several pensions from past employment. The recent economic situations left me several pots of money due to redundancy etc
    I really wish you were local to me here in Hertfordshire…I would be into you like a shot!

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