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To freeze or not to freeze?

I left my employer in March this year. I was a member of the final-salary scheme. I have now joined a new employer who does not allow new employees to join its final-salary scheme.

What do you suggest I should do with my frozen pension from the first scheme?

First of all, you will not have a frozen pension, in the sense that it will actually grow in value over the coming years. For many years, the early leaver from such schemes has had their pension protected against at least some of the effects of inflation.

Your pension from your first employer&#39s scheme will grow in value between the date you left employment and retirement. The exact rate of growth will depend on the component parts of what is more correctly known as a preserved or deferred pension. Part of your pension might be a guaranteed minimum pension – the part that replaces the state earnings-related pension scheme in the period up to April 5, 1997 – and the balance an excess pension which will increase at 5 per cent or the rate of RPI, if lower.

If you are going to consider transferring either to the new employer&#39s plan or to some form of private plan, you should engage an independent financial adviser to carry out a review for you. The first job will be to gather information about the benefits you have in your previous employer&#39s scheme.

As well as a thorough analysis of the shape of your preserved pension, the adviser will make investigations into the provision of death benefits if you were to die before retirement and how the pension might increase in value if you leave it as a preserved pension and later on retire.

Additionally, the adviser will look into the financial position of the scheme and ask the scheme administrators to provide details of the transfer value. This transfer value is the cash equivalent of the preserved pension figure.

The adviser will then carry out an analysis of the benefits and compare them with the possible benefits from a private plan or your new employer&#39s scheme.

It is a regulatory requirement that the independent adviser produces for you a transfer value analysis report and explains its contents to you before recommending a transfer away from your previous employer&#39s scheme.

A key factor for consideration will be the rate of investment return needed on transfer to a private plan to match the benefits you might have received from your employer&#39s plan. This is known as a critical yield and will give you an indication of the investment risk and volatility that you might need to accept on transfer. Remember, if you transfer from a final-salary scheme to a money-purchase plan, you will be shifting investment risk away from your previous employer and on to yourself.

Your financial adviser will ask you a lot of searching questions about your future plans, including your attitude to such things as investment, future interest rates, inflation, early retirement and who might be your beneficiaries on death before retirement. Your answers to these attitude questions will help your adviser to guide you in the right direction regarding your pension.

The transfer value analysis report will show you the possible benefits from two distinct types of private plan, the first type being a personal pension or stakeholder plan and the second a strangely-titled plan called a section 32 buyout policy.

The latter has attributes that are similar to the previous employer&#39s occupational scheme, albeit owned by you. This type of plan offers, on occasions, the prospect of greater tax-free cash and lump-sum death benefits. These are not, however, guaranteed to be better than those you might expect from a transfer to a personal or stakeholder pension plan. One advantage of the section 32 buyout policy is that later, if it is advantageous to do so, you can transfer to a personal pension. You cannot, however, transfer from a personal plan to a section 32 buyout plan.

Do ask your adviser to consider the consequences of early retirement and do note that it is likely that your preserved pension with your previous employer will be significantly reduced if you retire early. This is because it is likely to be paid to you for a longer period.

You might also ask your adviser to consider issues about your personal status. If, for example, you are not married, then a private plan might more accurately reflect your income needs in retirement but that is not a good reason to transfer many years ahead of actual retirement.

If you are in poor health, make sure you find out what the scheme&#39s policy is on enhanced pensions for those retiring in ill-health.

Whatever you decide to do, you must ensure you are comfortable with the investment risk you take on.

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