Should I Consolidate My Pensions?
Should I pack my pensions into one easy to manage place?
Many of us have worked for a number of different employers over our careers. Each time we move jobs, we tend to join a new company pension scheme. This can result in a pension headache with a lot of pensions scattered around with different providers. Unfortunately ladies, I only expect this to get worse with the introduction of auto-enrolment, which could mean that even short stints at companies add even more small pensions to a number you already have.
Having multiple pensions makes it difficult to get an overall picture of your retirement saving, including how your funds are performing and what fees you’re paying.
Plus, if you are anything like me, moving jobs or home means you can easily lose track of what you have. It is suggested that there is more than £400 million sitting in these 'lost' pensions, and that figure is predicted to increase dramatically following of the introduction of auto-enrolment.
If this you then, bringing together all of your pensions into one place can be a good way to get on top of your retirement saving - cutting the fees you pay and making it easier to keep track of your retirement investments. Remember control of your pensions will give you confidence in saving for the future.
Before consolidating, it is important to first establish what you would be giving up and what you would get in return. Not all pension plans are the same. Some give you certain guarantees and benefits. Others have different rules about what you can invest in, when you can retire or what benefits are available to your family on your death.
Why should I consolidate?
In general, consolidating can give you less administration, more control, lower fees and better performance.
A 35-year old with a £10,000 pension pot invests it until they are 65 in a fund that achieves 5% growth, with 2% charges a year. After the 30 years, their pot could be worth £23,720.
But if that same fund achieved 7% annual investment growth and an annual charge of 1.5%, the pot could be worth £48,541. Of course this doesn’t take inflation or risk into account and the growth examples are higher than I might base my thinking on, but they illustrate the point.
That’s more than double – or almost £25,000 more. And that’s quite a difference!
- Stop trail commission: If you opened up a pension before January 2013, you may be paying higher charges. A change in legislation called The Retail Distribution Review, altered the way charges were taken from pensions. In the past, commission was paid as an upfront lump sum usually followed by annual 'trail' commission. This comes out of your pension fund, reducing the value of your pension pot when you reach retirement age. Switching provider should cut the trail commission link. Commission is no longer allowed to be paid for new investments. However, an annual adviser fee may be paid - but only if you are receiving an ongoing advice service.
- Lower fees: It can be a nightmare to monitor the fees you’re paying to pension providers, especially when you’ve got several different pensions. To add to your worries, a lot of pension providers can be naughty by making their fees look lower than they actually are by sneaking extra and unnecessary charges like contribution fees, inactivity fees and fund fees into the small print.
- All your money in one place: It can be pretty tricky to keep track of your retirement savings. Why make your life difficult? Consolidating your pensions means that you only need to keep an eye on one pension. Plus, you only have to remember one set of login details and can rid yourself of the stacks of paperwork form different providers. This can make it easier to estimate the income you can expect to receive from your pension, and to see how your investments are performing.
- Easier to manage: If you combine your pensions, you can choose a new plan that can be easily managed online, so that you can log into your account from any device to check your balance, make a contribution or see your projected retirement income. This is another way in which consolidating your pensions can make managing your money easier, and put you back in control of your pension saving.
- Better-performing funds: We all want better returns on our investments. Most pensions pigeonhole you into a default fund – this may not suit your investment outlook or your appetite for risk. For instance, when you’re considering new pension plans, read the factsheets fully to understand how your money will be invested and how the investments have performed in the past. Just remember returns are never guaranteed and even if good performance has been seen in the past, it doesn’t necessary mean good performance will continue in the future. If you don’t feel comfortable choosing your own investments, I recommend you speak to an adviser.
What are the pitfalls?
You could lose valuable benefits, such as high guaranteed annuity rates and bonuses, or be hit with huge exit penalties. If you’re looking for switching advice, it’s vital to choose a financial adviser (IFA) with specialist pension qualifications.
- Exit fees: Some pension schemes - especially those started before 2001 - may charge you an exit fee if you move your money. The fee will usually be a percentage of your pension savings, although if your pension is in a ‘with-profits’ fund then your exit penalty may come in the form of a Market Value Reduction (MVR). Even if you’re going to pay exit penalties, it may still be a good idea to consolidate your pensions. If your new plan will give you a better rate then it may offset the amount you lose, particularly if you still have a long time until retirement.
- Guaranteed benefits: Before you decide to consolidate your pensions you should also consider whether you’ll lose any benefits tied to your old pensions. If you’ve ever been part of a defined benefit pension scheme (also called a final salary scheme) or if you have pensions with guaranteed annuity rates, then check what will happen to these guarantees if you move your money. If you’ve got a pension with guaranteed benefits that’s worth more than £30,000, you have to take independent financial advice before you move it.
When should I consolidate?
Sometimes the sooner you consolidate the better it can be. As you get nearer to retirement, your pension pots should have grown in value, and you may decide that any exit penalties or fees for advice represent significant disincentives to act – after all, you will have less time to recoup the cost before retirement.
But if you’re unhappy with your existing arrangements, and your funds are letting you down, it could still make sense to consolidate. You may still have 10 or 15 years to go, and transferring now gives you the added benefit of having all your money in one place for the purpose of buying an annuity or putting your money into income drawdown. For instance, if you transfer your pension into a SIPP you hopefully will never have to move this again as a SIPP will allow you take a retirement income (as not all pension do) as well as grow your funds.
What do I need to do?
It’d be worth asking all your pension providers to give you an up to date statement and a copy of their scheme booklet outlining how their scheme works. If this information is gobbledygook, you can consult a financial adviser so they can explain your pension benefits in English plus they will do all the leg work for you in terms of requesting the relevant information.
If you have misplaced old paperwork or the provider of your pension has changed you can track down lost pensions by using The Government's Pension Tracing Service. Just visit gov.uk/find-pension-contact-details.
Transferring pensions can be easy peasy. What is important is to check the value of any guarantees you might be giving up and the costs of transferring. If you join a new employer consider transferring your pensions to your new company scheme. The scheme administrators will be able to help you with this but they usually cannot provide advice. The alternative is a private pension scheme such as a low cost SIPP. These provide the best combination of low cost investment choice, online access and ease of management. You may want to seek financial advice on choosing the most suitable SIPP, reviewing all of your pensions and advising which pensions are best left where they are and which ones may be better moved somewhere else.
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Photo by Pete Bellis on Unsplash.
Written by Rachel Copley, DipFA, M.S.
Rachel is a Financial Adviser at Amicus Wealth.
As a child I always wanted to be a vet. I know my job now couldn’t be further from that but I guess the same principles could apply in that rather than helping animals, I am helping people. I know from a young age that I wanted to do something meaningful.
I graduated from Oxford University with a Masters in Chemistry. Although I loved working in science and looked great in lab glasses, I knew that a career working in research and development was at the time hard to find. A lot of pharmaceutical companies were going through large cut backs and by simply doing the maths this area unfortunately couldn’t offer me the financial benefits I need to do everything I personally aspire do to in life (if anyone has ever owned a horse, you know what I’m talking about). In addition I wanted the freedom and self-fulfilment of building something that was my own.
The financial adviser industry when I started was known for being stuffy, backdated and dominated by 50 year old men. I saw a great opportunity within Amicus Wealth to break this mould and work with like-minded ambitious individuals who want to apply their life skills to their career and in turn advise their clients in the best way they can by using simple language we all understand, uncomplicated by financial jargon and ultimately helping clients draw the parallels between their financial planning, their lifestyle and their personal success and happiness.
Start laying your financial stepping stones by arranging an initial chat or consultation with Rachel. You can contact her on: email@example.com or 02037276670 / 07533478925.
Amicus Wealth Limited is an appointed representative of Intrinsic Financial Planning Limited and Intrinsic Mortgage Planning Limited, which are authorised and regulated by the Financial Conduct Authority. Registered in England & Wales No. 08861673. You can find out more on the website www.amicuswealth.co.uk.