Under one roof: the benefits of consolidating your pensions
Consolidating products is often cost effective and convenient. Buying TV and broadband or gas and electricity packages from one provider, for example, is becoming commonplace.
But when it comes to our pensions, we seem content with leaving our pots of money scattered among various providers until we retire.
One in six workers has lost track of a company pension fund after moving jobs and 76% have no idea how much their contributions amount to, according to Prudential research.
Forgetting about a pension is akin to throwing your hard earned money down the drain and leaving it languishing in a poor-performing or high-fee-charging fund could significantly impact your retirement income.
How charges can eat into your pension
According to consumer group Which?, if a 35 year old with a £10,000 pension pot invests until 65 in a fund that achieves 5% annual investment growth, but charges 2% a year, the pot will be worth £23,720. The same £10,000 invested in a fund that achieves 7% annual investment growth, with a 1.5% annual charge, will be worth £48,541 – more than double.
Consolidating your pension
The obvious solution is to move multiple pensions into a single pot. This will make it easier to review how your funds are performing and give you a good idea of what your income in retirement is expected to be. It will also mean lower charges.
However, consolidating pension pots is not necessarily the best move for all savers.
Defined benefit schemes
People in final salary or defined benefit (DB) pension schemes are often advised not to transfer their money.
DB plans pay out a certain sum each year once you reach retirement age based on the number of years you have paid into the scheme and your salary, either when you leave or retire from the scheme (final salary), or an average of your salary while you were a member (career average).
A pension transfer from a salary-related pension scheme means giving up your benefits in the scheme in return for a cash value, which is invested in another pension scheme.
Switching pension providers close to retirement is often not recommended due to potential exit charges and the short time frame involved.
Over the page: questions to ask before you move your pension…
If you are thinking about transferring your pensions, the Money Advice Service suggests considering these key questions:
Will the new pension be more expensive than my existing one?
If the new pension costs more, make sure you’re satisfied that the additional costs are for good reason. For example, if the new pension offers you access to more funds than your current pension(s), ask yourself whether you need this. You wouldn’t take out a more expensive mortgage or insurance policy without good reason, so why do it with your pension? You’ll get information about the costs of the new pension in the Key Features Document that the pension provider or your adviser should give you. Make sure this document refers to the actual funds and investments that you’ll be using in your new pension. You need to read all the documents you’re given so you can clarify any issues you’re unsure about.
Is it a good idea to transfer all my pensions into a single new pension?
If you currently have several pensions and are looking to put them into one new pension, make sure you’re aware of any costs. If you’re taking advice your adviser should be able to explain them to you. You may not need a new pension to put all your pensions together. If one of your existing pensions already meets your needs and objectives it might be possible to transfer all of your other existing pensions into that one.
Will I lose any benefits?
It’s possible that your current pension has valuable benefits that you’d lose if you were to transfer out of it, such as death benefits or a Guaranteed Annuity Rate (GAR) option. A GAR option is where the insurance company will pay your pension at a particular rate, which may be much higher than the rates available in the market when you retire.
Are there any penalties if I transfer?
Some pensions may apply a penalty when you transfer out. These can be significant – sometimes several thousand pounds (depending on the size of your fund) so it’s important to check if one applies in your case.
Will the investments in the new pension be right for the amount of risk I’m prepared to take?
You may want to decide for yourself how to invest your money, or your adviser may make recommendations for you. Either way it’s important the investments chosen are appropriate for the amount of risk you’re prepared to take with your money – remember, investments can go up or down. If you use an adviser they will need to be clear about what fee they will charge, whether it’s for one-off or ongoing advice.
Will I need ongoing advice?
Depending on the new pension you choose it may be important for you to have ongoing reviews. Some fund selections need to be reviewed from time to time to maintain the balance of your portfolio. It is also possible that the amount of risk you’re prepared to take could change over time, for example if your financial situation changes, or as you get nearer to retirement. Your adviser should explain this, and whether it applies to the pension they recommend. If so they may be able to offer you an ongoing service.
Do I definitely need a financial adviser?
Ask yourself if you have enough knowledge and experience of investment to make decisions without the need for an adviser.