A zombie pension could be sucking your retirement income dry

The spookiest time of year is almost upon us when spine-chilling skeletons, blood-thirsty vampires and, most petrifying for your pension, decaying zombies are out in force. If your pension was set up decades ago, you could be one of millions trapped in an underperforming and very costly zombie fund.

An estimated £150 billion worth of pension savings are invested in funds that are now closed. These funds can have a devastating impact on your future retirement income.

 ‘Zombie fund’ is the somewhat unflattering name given to funds that are permanently closed to new applicants but have ongoing liabilities towards pension scheme members and other investors, possibly for years to come. With no new investors or policyholders there is no money coming into the business, only money being sapped out from pension charges and investors who leave.

Policyholders entombed in mortal funds

Many of these funds were once promoted by door-to-door salesmen who received very generous commission that was paid for by high policy charges. However, in the ‘90s the industry regulator, then the FSA, introduced a new rule that made companies disclose their costs. As the charges were often very high, the products were seen as less appealing and eventually the business model died.

The managers of these funds lack the incentive to compete on performance or charges and allow the business to run itself until the final policy matures. As such, they take a cautious approach to investment in order to meet future liabilities rather than allocate money to riskier assets in the hope of achieving a return on investments, and so there is little opportunity for pension growth.

In fact, it is more probable that your pension savings would be diminishing as a result of fund management charges that could be as high as 4% a year. However, while investors can choose to leave, policyholders are often trapped by extortionate exit penalties of up to 25%.

Worst of all, the owners of these pensions may be completely unaware that they’re invested in closed funds. It could be worthwhile digging out your paperwork to find out if your money is invested in a zombie fund.

Pensions perishing into the darkness

Zombie funds, although perhaps the most terrifying offenders, are not the only chilling culprit of poorly performing pensions. Many older schemes have high fees and low growth that can wipe thousands of pounds off the value of your fund. Such factors can have a significant impact on your future retirement income. In fact, you could lose £25,000 in growth for paying just 1% more in charges*. Whether you’re 10 years or 30 years away from retirement, regularly reviewing the performance of your pension is essential.  

You may have a couple of pensions from earlier careers that you do not have the time to look at or have forgotten about, but this could leave you with significantly less retirement income. Even the best pensions need to be reviewed to make sure they are on track.

Escape the wrath of a zombie with a pension transfer

pension transfer to a new provider is the only solution to escaping a zombie fund, however it is important to weigh up the potential fees in comparison to the potential gain through improved performance to decide whether it is worth transferring. You should seek regulated financial advice before making a decision.  

A pension transfer could considerably improve the performance of your fund. Also, if your current scheme doesn’t allow drawdown, transferring may also enable you to take up to 25% tax-free cash, which you can do legitimately from the age of 55. Although, drawdown is not suitable for everyone and depends on individual circumstances. You could also benefit from:

  • Reduced fees
  • Increased growth
  • Enhanced overall performance
  • More retirement income

If you’re unsure whether your pension is underperforming, or possibly invested in ghoulish zombie funds, we can help you find out with our free pension tracing service. If you have an old pension that you may have lost when moving house or changing jobs, we might be able to locate it for you.

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Call 0800 304 7288 for a friendly chat about your pension

Over 20 years, based on a £50,000 sum at onset, growing at 6% per year before charges of 0.5% and 1.5% are applied.

The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new

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