In the hustle and bustle of everyday life, pension consolidation is probably not at the top of your financial to-do list. It’s one of those things that can be done tomorrow as your funds are still invested, and you’re still receiving your regular updates. Is there any real urgency?
When you begin to examine pension consolidation in more depth, you will notice numerous pros and cons, some of which can dramatically impact your long-term finances. While you may decide not to proceed, it is crucial you consider the potential benefits of pension consolidation with your adviser.
Before going further, it’s important to address the issue of pension consolidation and eligibility.
Are all pension funds eligible for consolidation?
There are two main types of pension fund which are known as:-
Defined benefit (final salary pension)
Defined contribution (money purchase pension)
When examining the composition of your pension fund, you may encounter several restrictions, and when it comes to defined benefit pension schemes, consolidation is unlikely to be in your best interests.
Understanding pension consolidation
As the term suggests, pension consolidation involves amalgamating two or more pension funds. This then prompts the question, how many pension plans does the average person hold? One, two, three or four?
You may be surprised to learn that the average person in the UK will have around 12 different jobs over their working life. This means potentially 12 different pension funds of varying sizes and various benefits.
Many of us struggle with more than one bank account or credit card; therefore, it isn’t difficult to see the potential complications of having more than one pension fund, especially as we approach retirement.
Pension consolidation: The pros
While each situation will be different, there are a number of positive factors regarding pension consolidation.
Improved investment control
By consolidating your pension assets, you can take greater control over your investment strategies (whether advisory or managed) with the potential for improvements in long-term performance. While diversification is important, your pension investments must still align with your broader investment principles and attitude to risk.
Simplified administration
While administration is an important issue, it mustn't be the main factor because funding and investment returns should always be the main focus. However, the more pension plans you have, the more likely you are to lose track if you change address, change employment, or move abroad.
Cost savings
Many people find that consolidating their pension assets can lead to more competitive costs, such as transaction fees and annual charges. Since pension assets will likely be invested for over 40 years, charges can significantly affect long-term returns.
Pension consolidation: The cons
When considering pension consolidation, it is important to appreciate the cons and pros so that you understand the broader implications of change.
Exit charges
If you decide to consolidate your pensions, you may find your plans are subject to exit charges; hence, the net transfer value may be less than you expected. While excessive fees do warrant consideration, it’s important to look at the consolidation of your pension assets in a wider context and on a long-term basis.
Transferring your pension assets
In theory, transferring your pension assets into a consolidated fund is relatively straightforward, but in practice, it might not be as easy as you think. Your pension advisor can assist in collating the appropriate paperwork, obtaining the relevant valuations, and contacting your various pension providers directly.
Loss of benefits
As discussed earlier, a defined benefit pension scheme will provide a guaranteed income based on your service and final salary. There are regulations to ensure that the appropriate advice is taken before proceeding with this type of transfer. Other pension plans may have certain guarantees and benefits, such as life insurance cover, that may be difficult to replicate if you consolidate your plans
How to consolidate your pension assets
Before consolidating your pension assets, you must take advice and gather as much information as possible about your pension plans and investments. This will include information such as:-
* Investment strategy
* Risk profile
* Benefits
* Charges
* Historic returns
* Current value
* Transfer Value
* Retirement date
Many automatically assume that their retirement date, the day they can access the funds, will be the same across all their pension assets. This is rarely the case. Some older pension schemes will have early retirement ages, while more recent plans will consider new legislation and extended retirement dates.
While much of this information is available online, it is worth involving your pension adviser to ensure that no plans are missed and no information is overlooked.
Choosing a consolidation method
When consolidating your pension assets, there are two main options, which include:-
Personal Pensions
Self Invested Personal Pensions (SIPPs)
It is essential to recognise that while your employer is obliged to contribute to your workplace pension, there is no such legal obligation towards a personal pension. Some employers will quite happily contribute to personal pension plans, but this should not be taken for granted.
Pension fund management - an ongoing process
Ensuring pension fund contributions during your working life is essential, but managing your funds should be seen as an ongoing process. It's important to keep track of your pensions, fund performance, charges, and forecasted income in retirement. However, it’s critical that you retain the services of your financial adviser because even the best-laid plans may need to be tweaked and adjusted during your working life and into retirement.
Your pension assets should be reviewed regularly, in line with your broader finances, to determine potential changes, and this also ensures you keep track of all pension plans.
Conclusion
Over the years, I have seen and sometimes felt the impact of regulatory changes and wider market movements. Unfortunately, I have also seen the long-term impact of incorrect financial advice, particularly regarding pensions. It is important to review your pension assets in tandem with your wider finances, looking at issues such as pension consolidation.
Even if you see this as simple housekeeping, which can be done anytime, in reality, tens of billions of pounds of pension assets have been “lost” over the years through poor administration - something that could have been easily avoided.
If you have concerns about the structure of your pension assets and the long-term impact on your finances, it’s important to act sooner rather than later.
Get in touch with Scott Kingsley
Contact Scott Kingsley today if you would like to discuss your pension assets and broader finances in more detail. There is no charge for a chat, and it could be life-changing for your finances.
Scott Kingsley, Financial Advisor at Misthos Group