Moving between companies has never been easier. Changing careers, even more than once, is not unusual throughout working life. With this in mind, it is essential to consider pension consolidation.
With each change, you will likely join your employer’s pension scheme. It’s easy to build up half a dozen or more by the time you retire.
Keeping track of existing pension benefits can be challenging. Especially if you move home or your former employer goes out of business.
It is worth reviewing your pensions if you are near or far from retirement.
How do you combine your pensions?
You may have accrued several types of pension over the years, for example:
- Personal Pension Plans. These can include Workplace pension schemes or Group Personal Pensions.
- Defined contribution pensions
- Defined Benefit Schemes – final salary pension schemes
Defined Contribution and Personal Pensions
It’s easy to combine personal pensions or money purchase arrangements. However, care should be taken. Some schemes offer certain guarantees, which would be lost on transfer.
Final Salary Schemes
Pension consolidation of Final salary pensions needs to be carefully reviewed. You will need to take advice on any transfer that is over £30,000. Understanding if combining your pensions is in your best interests is essential. For most people, the guarantees outweigh the benefits of consolidation.
Reducing the number of pensions you hold can be beneficial. However, you need to consider the benefits of consolidation for each plan on its merits.
Benefits of transferring your Pension
There are reasons why consolidating your pensions could be the best option:
- Cost—Charges may be reduced. Older plans can be more expensive, but investing has become more competitive over the years.
- Investment Choices—Newer arrangements have access to thousands of funds. A pension plan set up thirty years ago might only offer a handful of funds and be closed to new business. Modern workplace schemes tend to have a limited ‘default’ investment choice. If you do consolidate pensions, you should diversify your investments. This is only possible with a good selection of funds.
- Flexibility – Pension Freedoms started in 2015. This gives pensioners more choices in retirement. They can decide how to draw their pension income. It also means that pensions can be passed on to the next generation. This is either as a lump sum or as a beneficiary’s drawdown. Many older pensions don’t offer this flexibility. Old Stakeholder plans may not give you the options you might need. Or vary the proportions of tax-free cash and income taken. A modern plan is required to take full advantage of the new freedoms.
- Simplicity – should not be the only reason to consolidate pensions. Holding all your pension funds in one plan makes it easier to manage. You can see your investments easily and review their performance. A suitable portfolio can be created to match your goals and risk profile. It’s also simpler to withdraw income from a single source. You can monitor the investment regularly to avoid running out of money.
Potential Downsides
Combining pensions has its advantages. However, there are reasons why it might not be suitable. For example:
- Your existing pensions may have very low charges, especially if the scheme is linked to an employer. It is always worth comparing the charges on a like-for-like basis. You need to consider the cost of any advice. Higher charges do not rule out pension consolidation. The new plan may offer value for money and might have more suitable investment options.
- Your existing pension pot might offer guaranteed annuity rates. These are not available on new plans and should be considered. For some clients, giving up any guarantee is not suitable. The idea of a fixed income might appeal. You would also need to take into account investment risk. You might feel that the new plan’s growth potential outweighs any lost guarantees. This can only be judged on a personal basis.
- Some older plans offer a tax-free lump sum higher than the current standard 25%. It is possible to preserve this. This is done by winding up the old scheme. Benefits would then be moved to a Section 32 Buy-Out contract. Sometimes the need to be flexible is more important than tax-free cash. This is especially so if the benefit is marginal.
Summary – pension Review Service
If you think you should review your pensions, seek financial advice. Check the financial conduct authority’s register of approved Independent Financial Advisers. This will tell you if the adviser is authorised to give you advice. For lost benefits, you could use a pension tracing service.
Please feel free to contact us. We can explain your retirement options.
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