Thanks to the creation of Auto-Enrolment, which compels you and your employer to contribute to your pension, you’re guaranteed to build up several pension pots through your working life. On one hand it’s great that so many of us are saving for retirement, but on the other, it can be tricky to manage our savings when we have a trail of small pension pots in our wake. Here’s everything you need to know when deciding what to do with a pension from an old employer.
You can’t cash in your pension before your 55th birthday
If you’re younger than 55 it’s not recommended that you attempt to cash in a pension from an old employer, as you’ll have to pay a hefty tax penalty. HMRC doesn’t look too kindly on early pension withdrawal and will charge you up to 55% tax on whatever you withdraw. Because of this penalty, no reputable pension provider would let you withdraw a pension early, so if someone offers to help you unlock an old workplace pension before 55, it’s highly likely to be a pension scam. That means you could risk losing your whole pension pot, and would still have to pay 55% of its value to HMRC on top.
But you can move your pension at any age
Although you might not be able to withdraw your savings straight away, if you’re under 55, you can move a pension from an old employer at any time. Too often savers trust that their pension is looking after itself when they leave an old job, but this isn’t always the case. That’s why it’s important to check your pension balance regularly and ensure your money’s being invested in line with your expectations. It’s possible that an old pension from several years ago could be stagnating, not necessarily losing you money but not growing your retirement savings either.
If, for example, you want to take more risks and give your savings more opportunities to grow, you may need to transfer to a pension that’s more closely aligned to your investment objectives. Excessive fees can also be a big motivator! We’ve written extensively about the hidden pension fees some providers charge, and each year we call them out in our Robin Hood Index. It’s alarming to see how much of their savings people can lose when they aren’t aware of what fees they’re paying. Old pensions are frozen the moment you stop paying into them, so instead of management and policy fees coming out of new money that you’re paying in, they’re taken from your balance which can keep going down over time if you don’t keep an eye on it.
The more pensions you have the more sense it might make to move them into one so you can get an accurate picture of what your money’s doing, and avoid leaving any behind. If you think you might have already lost a pension from an old employer, you can use the government’s Pension Tracing Service to try and track it down. This pension finder is free to use and, if you know the details of your employer or the provider your company pension’s with, it should be relatively straightforward to find a pension. PensionBee can also help you move all of your old workplace pensions into a new online plan. We just need some basic information like the pension provider name and ideally the policy number.
It might not always make sense to transfer, though
While transferring all of your old workplace pensions into a single personal pension is one of the best ways you can keep track of your retirement savings, there are some instances when it won’t make sense to move an old workplace pension. While most workplace pensions are defined contribution schemes, which are valued on how much you’ve paid in and how your investments have performed, some older ones are defined benefit schemes, which are valued based on your salary and the number of years you worked for your employer.
Defined benefit pensions can come with some special benefits that you’ll lose if you leave the pension scheme. These can include anything from a guaranteed annuity rate upon retirement to critical illness or life cover for the duration of the policy. For this reason it’s a legal requirement to seek the advice of an IFA if you’re considering transferring a defined benefit pension worth more than £30,000. If you have a public sector pension it’s unlikely you’ll be able to transfer to a new pension scheme. If you think you might have a defined benefit pension you should double check what special pension benefits it comes with by referring to your paperwork or speaking to your provider.
Cashing in your pension from 55 with PensionBee
Once you turn 55 we can help you take cash from your pension via drawdown. Our drawdown option gets activated as soon as you reach your 55th birthday and you can withdraw whatever money’s in your old workplace pensions, taking up to 25% tax-free. Withdrawals over 25% will be taxed at your marginal rate so you’ll need to consider how much you take out in one go to ensure your money lasts for the duration of your retirement.
Drawdown from PensionBee is a simple, stress-free way to take cash from your pension and you can request withdrawals from your Beehive in just a few clicks.
PensionBee does not permit unauthorised payments, before the age of 55, under any circumstances. This information should not be regarded as financial advice. As always with investments, your capital is at risk.