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. You can find out more at his company website. You can also read his other articles on Monevator. Let us know in the comments if there’s a topic you’d like Mark to cover.

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