Life of a pension saver part 2: consolidating your pension plans
Not too long ago, it was common for people to work for the same employer throughout their working life. As a result, people often had a single workplace pension when they came to retire, which was often a final salary scheme.
Those days have, on the whole, passed. Today’s pension savers are more likely to move between several employers during their 40+ years of working, accruing benefits in different pension schemes as they go. They are also more likely to be saving into defined contribution pension schemes, particularly in more recent employments. These changes mean it is more important than ever for people to take an active role in their pension planning. Those looking to do so may benefit from consolidating their funds and considering the flexibility offered by different types of pension, such as a platform SIPP.
A self-invested personal pension (SIPP) is, as the name suggests, a pension which enables investors to choose the investments within their pension plan. Some SIPPs can hold any assets allowed by HMRC, including commercial property and unlisted shares. Platform SIPPs provide access to an investment platform, sometimes known as a fund supermarket. Platforms enable investors to trade in a wide variety of investments through a single online account.
The advantages of consolidation
Having several small pensions might not be problematic while you are working and accumulating benefits; however it’s unlikely to be the most efficient use of your funds. By consolidating your pensions, individuals may be able to save time and money, as well as improve your chances of achieving a good return on your investments.
One benefit of consolidation is the potential to reduce fees. In particular, fixed product fees for holding each separate pension can be reduced if all funds are within the same plan. Fees charged as a percentage aren’t duplicated in this way because they are based on the value of a plan or individual investment. However, fees vary between providers and depending on how the investments are held, so it’s still possible to save money.
For example, platforms can often offer lower fees for the underlying investments than individual fund providers. Additionally, some firms use tiered charging structures which apply lower fees to higher fund values, making it more attractive to consolidate.
In defined contribution (DC) schemes the size of a person’s pension fund determines the benefits available at retirement. Whilst this will partly depend on the contributions paid, investment performance also has a huge effect on the value of a pension. Workplace auto enrolment schemes have default investment funds, but these are usually reasonably low risk and may not achieve the returns someone might hope for.
The alternative is to choose from other investments offered by the schemes. However, even if you are financially savvy, you may find it a daunting task to regularly review and update investments across multiple pensions. Having a single pension could make it easier for more investors to research the investments available, keep track of the performance of their fund, and make changes as appropriate.
The potential for growth
Once someone decides to consolidate their pensions and actively manage the investments, their next steps will be to choose a pension scheme and decide on the investments. Perhaps the natural inclination is to move the funds into an existing pension, but investors should consider whether any of the schemes are suitable. Whilst workplace pensions will be a valuable first step for many, they may not have the flexibility to meet the needs of investors moving into this stage of their retirement planning.
Workplace schemes often offer limited investment choice because they accommodate a vast array of investors, including those with very little investment experience. Investors looking to actively manage their funds, possibly with the help of their financial adviser, are likely to need a greater choice of investments. Platform SIPPs not only offer that choice, but they also simplify investment management by providing access to multiple fund providers through a single account.
This combination of choice, low cost and simplicity makes platform SIPPs an attractive proposition to those starting out in the world of bespoke pension planning.
Jessica List is a pensions analyst at Suffolk Life
Click HERE for part 1 which looks at why auto-enrolment is a good starting point for pension savers.
Click HERE for part 3 which examines bespoke investing options.