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How Freezing Pensions Works

Richard Beardsworth Pension Expert

By Richard Beardsworth.

Independent Financial Advisor

More Reading on Company Pensions...

Your pension pot and water have a lot in common. For example, both can be observed in a liquid state and both can be frozen. The trick is knowing which state is best at any given time. Insofar as pensions are concerned, there are times when liquidating your assets is a good way to gain access to much-needed cash. There are other times when freezing your pension is advantageous. So, how do freezing pensions work?

The first thing to know is that there are two kinds of frozen pensions. The first has to do with state pension payments while the second is related to workplace pensions. We will explain both in detail. Bear in mind that freezing a pension does affect eventual retirement income and, in the case of workplace pensions, the performance of your funds over years of investing.

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Freezing the State Pension

Every UK worker with at least ten years of National Insurance contributions is eligible to receive state pension payments upon reaching retirement age. Those with 30 years of service are eligible to receive the maximum payments allowed by law. A key benefit of the state pension system is that payments are indexed to inflation. As the cost of living goes up, so do state pension payments. Yet this only applies to pensioners who retire and continue to reside in the UK.

The government has taken to freezing pensions belonging to UK workers who retire overseas. In other words, expatriate pensioners are still eligible to receive their legally entitled state pensions, but their payments are not indexed to inflation. Payments are frozen at whatever level they are at when the pensioner sets foot in his or her destination country.

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For purposes of illustration, consider a silver pensioner who decides to retire in New Zealand. If his state pension payments were set at £125 per month on the day he arrived in New Zealand, they would remain at that amount permanently. The only way to receive higher payments indexed to inflation would be to return to permanent residency in the UK.

Freezing a Workplace Pension

As you might imagine, freezing a state pension does not affect returns because the pensioner does not invest that money. However, it still affects retirement income inasmuch as a frozen state pension never increases in value. What you get is what you get for as long as you remain an expatriate. Freezing pensions as a private investor is different.

A frozen workplace pension is one that is currently intact but to which no further contributions are being made. For example, you may have been enrolled in an occupational pension through a previous employer for whom you no longer work. If that pension was not cashed in when transferred, it still exists as it was the same day you left your job. Nevertheless, it is considered frozen because neither you nor your employer continues contributing to it.

Frozen pensions are created in a number of different ways:

  • Changing Jobs – The norm in the modern workplace is to change jobs between three and five times during one's career. With so many job changes comes the potential for freezing pensions. Often these pensions are forgotten about or ignored entirely, to the detriment of the saver.
  • Better Options – From time to time, a pension saver will determine his/her current workplace pension is not performing up to expectations. Rather than cashing out or transferring, the worker may choose to leave the pension intact but direct his/her investment monies elsewhere. The current workplace pension would then be frozen.
  • NEST Pension – The newest avenue for freezing pensions in the private sector is participation in a NEST scheme. Under NEST rules, savers are not required to continue contributing to a pension fund if they choose to opt out. However, any monies already contributed to the scheme must remain with it until the account is closed at the age of 55 or older. NEST funds cannot be transferred to other pension plans. Therefore, no longer contributing to a NEST scheme automatically freezes it.

Advantages and Disadvantages to Freezing Pensions

There are both advantages and disadvantages to freezing pensions in the private sector. The biggest advantage is being able to leave your pension pot alone to continue earning. This advantage is most attractive in cases where a pension fund is doing very well in terms of investment performance. If the opposite were true, there would be no point in freezing that pension.

The disadvantages of freezing pensions are more numerous. These are as follows:

  • Limited Earning Power – A pension fund into which no more contributions are being made is naturally limited in its earning power. The total value of such a pot rises or falls based solely on investment performance. If a fund falls too far, there may not be enough money left to make substantial growth possible in the future.
  • Limited Options – A frozen pension is also limited in terms of your investment choices. Any money in that fund can only be invested in ways the pension administrator allows. There is nothing you can do to pursue a more attractive investment opportunity if your current plan does not participate in it.
  • Lost Pensions – Having one frozen pension is not a big deal in terms of keeping track of it. Nonetheless, people who change jobs multiple times during their careers tend to forget about pension schemes of the past. This can result in what is known as 'lost pensions'. These are pensions that still exist in the names of members despite those members having forgotten about them entirely.
  • Poor Planning – Successful retirement planning means taking advantage of every available opportunity to improve one's position. A frozen pension is an opportunity limiter. By its very nature, it is no longer capable of providing the maximum benefit because you are no longer contributing to it. Therefore, it is not likely helping your overall financial plan all that much.

Although freezing pensions is an option under several different circumstances, it should be clear that it is not usually the best option. Any pension saver with one or more frozen pensions should certainly sit down with a certified financial advisor and discuss ways of better utilising the money. It may be the advisor suggests leaving frozen pensions as they are. However, in all likelihood, the advisor will have other options that are more profitable.

What to Do If You Have Frozen Pensions

If you have one or more frozen pensions, it would be a good idea to come up with a plan for using them. Doing so starts by finding out what they are worth and how well they are performing. This information is available directly from pension administrators. Simply contact each administrator and ask for a current pension statement.

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If you think you may have lost pensions out there, the average financial advisor can help you track them down. The government also offers a free pension tracing service through the GOV.UK website. Any chance that you might have a lost pension is reason enough to run a trace.

The last step is to sit down with all of the information and evaluate it in light of your overall financial plan. What do you hope to achieve for the future? How much income do you want during retirement? How can your frozen pensions help you reach your goals? All of these things should be taken into consideration so as to apply your frozen pensions to your plan properly.

Freezing pensions is something both you and the government can do. Yet it is rarely the wisest course of action. Carefully consider frozen pensions as you make your plans for the future.

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