Pension consolidation, why, how and when not to
As the workforce transitions between generations, the number of jobs people have across their lifetime changes. A single lifetime job is far less likely in today’s world than it would have been even just one or two generations ago. With workplace pensions now compulsory, it is not difficult to find yourself with several pension plans by the time you are 40 years old. But should you consolidate your pension pots?
The are several thousand blogs, articles and websites you can search for on the internet which will cover pension consolidation, but in this article, we explore:
- Why you should consider consolidating your pension plans
- When you shouldn’t consolidate your pensions
- How you can consolidate your pensions yourself
Why consolidate your pension pots
There are several reasons to consolidate your pensions, each providing equal benefits to you, the investor.
Recent research from the US Bureau of Labor Statistics found that people born between 1957 and 1964 had on average 11.7 jobs across their lifetime, this could result in 11 or 12 pension plans in circulation. Administering, managing and keeping up to date with this many plans can be extremely time consuming.
Consolidating your pensions into one plan can save you time, making your pensions easier to manage.
When we say manage your pensions, we mean keeping on top of whether your pension plans are on track to help you reach your financial goals. This includes keeping up to date with the funds’ performance.
If saving time is something you’re interested in, consolidating your pension plans could be the right choice.
On every pension plan you will be paying administration fees to each pension provider. This can be difficult to keep track of and not all providers charge the same fees.
If you think a small difference in fees doesn’t make much of a difference, look at the example below.
Imagine you are 39 years old and have a pension pot with £50,000 in it. You contribute £250 per month into your pension until you retire and receive a 6% investment return each year.
If the pension provider applied a 2% annual management charge, your fund at retirement would be worth £334,046.
If the pension provider applied a 1% annual management charge, your fund at retirement would be worth £420,767.
The difference is clear to see. A 1% difference in fees can cost you £86,721 in investment returns.
Improve investment performance
One of the reasons we help clients to consolidate their pensions (if applicable) is to make their investments ‘work hard’ for them.
By ‘work hard’ we mean ensuring your pension plan invests to deliver performance in line with your financial needs and goals. Most pension plan providers are low risk and are not making investment decisions to boost your pension value or to help you reach a financial goal.
It can be difficult to keep track of multiple pension schemes’ investment performance. Not to mention know and understand if what your provider is investing into will help achieve your financial goals.
Understanding investment performance isn’t something that comes natural to everyone, neither does understanding how investments should align to your financial goals. As financial advisers we regularly see pension plans that are set up by employers taking no consideration of the individuals’ financial goals. The worrying part here is employees are typically asked to tick low, medium or high risk – something they don’t truly understand themselves!
It makes sense to take more interest in your pension’s investment performance and understand how they do or don’t align to your financial goals.
Improve your options
Creating better options for yourself at retirement may also be a reason to consolidate your pension plans.
Many older schemes, set up years ago, have reduced flexibility in accessing your funds as retirement approaches.
This could be a sound reason to consolidate your pension plans, to improve the flexibility you have at accessing your funds.
Before pension freedoms were introduced in 2015, people often had to buy an annuity – a guaranteed income for life, although in certain instances capped drawdown (which placed limits on the amounts that could be withdrawn) was an option. With the introduction of pension freedom, income drawdown became far more widely available.
Staying in an older pension scheme could reduce your options for income drawdown when you approach retirement.
Why you shouldn’t consolidate
Pension consolidation isn’t always the best option for everyone, after all, our circumstances are individual to us.
Loss of valuable benefits
Before charging ahead and consolidating your pensions, you should beware of any benefits you may lose as a cost of transferring from one pension plan to another.
Some pension plans have benefits attached to them, such as a guaranteed annuity rate or an enhanced tax-free lump sum amount above the standard 25%. You could also be losing any life insurance built into the plan.
The key here is to understand what benefits you stand to lose from transferring.
Final salary pensions
If you’re lucky enough to have one of these, also known as a defined benefit pension, it is likely more beneficial to keep with it.
Final salary pensions offer you a guaranteed income for life and most are inflation proof, with pay-outs rising year on year in line with inflation.
These plans will also pay out to any surviving widow when you pass away, providing financial security and peace of mind for your family.
Current plans are performing
If you are comfortable analysing your pension plans investment performance and you can align performance to your own financial needs and goals in retirement, you may decide everything is going well.
Should this be the case, why would you change anything!?! As the saying goes, if it’s not broken, don’t try and fix it!
Huge exit fees
It’s important to identify the fees involved with transferring out of one plan into another. You could be faced with exit fees when consolidating your pensions.
If you are looking at consolidation and still have 20 or 30 years until you retire, it might make sense to consolidate as the cost savings you make in annual management fees may outweigh the cost of the exit fees.
If you are closer to retirement age, then it may not be cost effective for you.
Either way, be sure to calculate the exit fee costs and the impact they have on your pension pot.
You’re happy with how things are
If you’re happy not knowing anything about your pensions and have no interest in making your money work best for you or knowing, you’ll have enough money in retirement to support you…do nothing!
Everything is your choice, it’s your pension, it’s your retirement, it’s your life.
PS, you might not be interested in the next section.
How to consolidate your pension plans
Pension consolidation itself couldn’t be any simpler in today’s world.
Using online technology, you can collate all the details of your pension plans, access your accounts online and simply fill in a transfer request form on the providers website.
Sounds simple enough right?
Whilst actioning the transfer requests may be, for want of a better word, simple, knowing you are transferring the right pension plan to the right pension provider is not so simple.
In addition, you may not actually have all your pension pot information.
In the UK, according to The Association of British Insurers, 1.6 million pension pots with an average value of £13,000 have been misplaced or completely forgotten about. This is a total of £19.4 billion outstanding or forgotten about. If you have forgotten any old pension plans you may have, you can search for them through the government website here.
To understand why consolidating your pension pots isn’t simple, if we revisit earlier sections of this article, there are certain questions you’ll need to answer:
- Which pension plan should I transfer?
- What are the exit fees?
- What benefits am I losing?
- Which pension plan should I consolidate to?
- What are my financial goals?
- What are my financial needs in retirement?
- What are my later life financial needs?
- How much do I need in my pension pot?
You will also need to understand the investment performance of your pension plans and the options available to you when the time comes for you to access your funds.
Fees can not be the only driver in your decision-making process, although if you looked at our example above, we understand why you might be quick to make a decision.
Most importantly, when consolidating your pension plans, you should identify your financial needs and goals. By this we mean understanding your retirement/later life financial needs and your own, bespoke, financial goals – what is it you are trying to achieve?
On the front of it, yes, transferring your pension plans into one pot can be simple, but making the right decisions for the future you requires expert knowledge and understanding.
You could consolidate your pensions into one, easy to manage pension, but if you are not familiar with managing investments and their performance, you could easily make a costly mistake and impact the funds available to you at retirement.
Answering the above questions can be rather daunting at the best of times, if it’s not your profession.
If investments are not your forte, you should seek the help of a financial adviser.
Financial advisers have the knowledge and tools available to help you make the best choices for the future you.
If you’d like a pension review, please do not hesitate to contact a member of our team. If you cannot locate all your pension information, our team may be able to assist in gathering this together.
If you’d like to consolidate your pension plans in to one easy to manage plan that’s right for you and your financial needs and goals, our team can help.
We are an award-winning Chartered Financial Planner with the prestigious Gold Standard Pension Specialist award.
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