What is it? Basically, it means combining all, or most of your pension pots into one place. Sounds like a good idea, simple and easy but is it right for you? This is the most important question to keep in mind before embarking upon this journey.
Many years ago, this question rarely came up as people tended to only have two or three employers throughout their working life and when they reached retirement, they would take their pension benefits directly from these companies, as they were mostly final salary pensions and they might have an AVC (Additional Voluntary Contribution), which the company typically arranged an annuity for the retiring employee.
However, the world has changed. People nowadays can have numerous employers over a working life, or they may have been self-employed. This could mean they have lots of different pension pots with different employers, or their own personal pension if they have been self-employed and the questions is, what happens to the pensions through the interim years before they retire?
We have seen the situation where someone was trying to figure out how they take their pension income from twelve different pensions schemes, with different rules on how you can take the benefits. It can be resolved but more importantly, how have these funds performed over the years and what kind of flexibility is there when taking the benefits.
When the UK government made it compulsory for employers to offer workplace pensions through Auto-Enrolment (providing you meet the required criteria), people are now almost certain to be accumulating many small pension pots during their working life.
It is encouraging that more people are saving for their retirement earlier, rather than typically leaving it to chance. However, with the number of pension policies that people are now accumulating, people can find it difficult to manage these savings and they can tend to forget about smaller pensions when moving to new employment.
With all the anticipation of settling into a new job and meeting the challenges that comes with the role, it’s easy to forget about a small pension pot that’s built up from a previous employer. It might only be a few thousand pounds, but keeping track of it and combining it with other funds, could add up to a tidy sum when you retire. This is where consolidating pensions could be a way of making things a bit easier to manage.
You can currently only gain access to pension funds after your 55th birthday. If you’re younger than 55 years old, no reputable pension provider will let you take money from your pension early unless there are extenuating circumstances.
Although you might not be able to withdraw your pension funds if you’re under 55, you are, however, allowed to move an old workplace pension and any personal pension if you wish to. Typically, when people leave an old job, they usually leave their pension with the current provider and trust that their pension is looking after itself and performing as it should but this isn’t always the case.
Old pensions whether Personal or Workplace are often filed at the back of your mind but you have every intention of getting to grips with how they are doing. Unfortunately, they often remain filed away until one day you suddenly receive a ‘wake up’ pack from the provider five years before your retirement date, revealing the reality of your retirement fund. Unfortunately for some people, if it’s not what you expected, it could be too late to do anything to make an impact on the value. So maybe it’s time to ask yourself a few questions.
- Have you checked your pension, or pensions lately?
- How well are they performing relative to current market conditions?
- How diversified is the pension fund portfolio?
- Is there a wide selection of funds to choose from?
- What is your view of risk and has it changed over the years?
- Do the funds match your attitude to risk now?
- Are the provider fees excessive?
- How flexible will the current contracts be when taking the benefits?
- Are the pensions on target to pay the income you need in retirement?
Ease of Administration
If you are someone with several pension plans, it’s understandable that it can be difficult keeping track of them. The chances are, you’ll be drowning under a pile of paperwork and statements from each company, which arrive at different times throughout the year and then you need to make sense of it all. If on the other hand, you have consolidated your pensions, one of the greatest advantages is peace of mind and ease of the administration. With just one pension, it is much easier to understand which helps keep a track of everything.
You will only receive statements for one plan and record keeping becomes much easier too, which is particularly useful if you want to make a large one-off contribution to make use of your pension ‘carry forward’ allowance. If you have any unused allowances from the previous three years, this can be mopped up more easily. If you still had several different pension plans, it can end up being quite a colossal task because you need to contact each provider for information and invariably you can get held up by some companies dragging their heels.
When moving from one pension plan to another, one of the most important considerations is that the new pension offers the widest possible choice of investment funds. This will allow the capital to be diversified by investing with several different asset management groups, over a wide range of sectors, and are geographically spread.
This type of spread gives you the best opportunity to achieve greater capital growth, as the individual funds can be changed if they start to underperform relative to their peers, or if it becomes prudent to increase exposure to a specific sector. However, many older pension plans do not appear to be particularly diversified at all and the choice of funds available can be very limited, thus reducing the potential for capital growth. What has tended to happen when people initially become members of the scheme they are often put into the ‘lifestyle’ or ‘default’ option offered by the provider and then they tend to remain in this option whilst continuing to be a member of the pension scheme.
Another consideration is your view of investment risk. When you join a pension plan or set up any kind of investment, you would expect to hold funds that matched your view of investment risk. The younger you are, the more likely you are to have funds that are in the balanced to adventurous range but the older you become, you are more likely to want to gradually reduce your exposure to risk. This is particularly important the closer you are getting to your retirement age. Typically, we often find that people’s pensions get left behind and over the years, the funds in the pension eventually do not match the person’s current view of risk, which may by then be more at the cautious end of the risk scale.
Cost of consolidating
One of the main things to consider before moving any pension is, what is the cost of transferring? What you should look at is the exit costs of the old plan, versus the cost of the new pension. Exit costs are usually capped if you are getting close to retirement, therefore, in a lot of cases, the exit charges go down gradually and may not apply to your pension. Another thing that needs to be taken into account, is that as soon as you stop paying into a workplace pension everything is frozen at that stage, which means that instead of provider fees coming out of new contributions, they will now come out of the value of the fund, which can continue to reduce over time. There will of course be charges involved in any new pension plan if you move all of your pensions and costs can vary, therefore this needs to be taken into account before moving a pension. But while costs are important, it doesn’t mean that the cheapest option is better.
Consolidation may not be advisable for every pension. It might not always make sense to combine your pensions. However, your adviser can review your current funds and offer expert advice on which pension policies to combine, and which would be better off remaining where they are.
While transferring your old workplace pensions into a single personal pension is one of the best ways to keep track of your retirement savings, there are some financial situations when it does not make sense to move an old workplace pension. Some older pension policies could have valuable guarantees, such as Guaranteed Minimum Pensions, or protected higher Tax Free Cash percentages and these could be lost if you transfer. Your adviser will assess the situation should you have any of these specific pension benefits.
Since the introduction of Pension Freedoms, there has been a lot of interest in consolidation of pensions as there is more flexibility in how you can take your pension benefits whilst ensuring that you can leave any remaining funds to your beneficiaries in the way that you wish to.
When considering combining your pensions, it’s always advisable to speak to your Adviser at Birchwood who is experienced in assessing the viability of Pension Consolidation.
They can assess all your pensions, check what provider charges apply, whether your ‘old” pensions offer the flexibility you want in retirement. They will also discuss your attitude to risk and what your retirement objectives are. Once your adviser has reviewed all of the information, they will provide an in-depth report and talk you through their advice and recommendations on how you can improve your current and future financial situation. They will also advise on whether consolidating pensions is a worthwhile and appropriate option for you.