Your quick guide to rounding up old pensions
What to do with your old pension plans? Keep hold of them and hope for the best, or think about rolling them into one? Jaskarn Pawar, Independent Financial Planner, outlines the key points you should check before transferring old pensions into a single new plan.
When I meet a new client, I’ll often find that they are holding more than one pension. Typically they’ve held onto these pots for years, not really knowing what else to do. In many cases, it turns out that they would be better off transferring these pensions into a newer, better pension plan.
So why would you consider transferring your pension? I’d suggest three key reasons.
- Reducing your costs or getting better value for money than offered by your current pension provider.
- Gaining access to a better choice of investment funds.
- Getting online access for easier monitoring, better functionality and features.
Here are the checks you need to make first, before taking any decisions about moving your pension.
Assess the costs
Costs are an important factor in any investment, but they’re not that easy to get right. Often it’s not just a simple case of choosing the lowest cost options. Sometimes cheap really does mean cheap – but expensive doesn’t always mean quality. The first thing to do is find out the costs and exactly what you’re getting for them, and then assess the value for money.
This means you need to know a) your current pension charges and b) the charges for the new pension (along with full details of what these include). Mostly you’ll be comparing annual charges, but do find out if there are any other charges, such one-off admin fees, dealing fees or transfer fees from either provider.
Check the fund choice
When seeking value for money, a really good fund choice is central. The quality and variety of funds available to you will influence your pension’s performance; the more limited the fund choice, the more restricted your investment strategy will be. In my view, a limited fund choice simply makes it harder to create a strategy tailored to your needs, or one that delivers the required performance.
Compare the variety and range of funds are available from your current provider with those of potential alternatives.
Confirm the contract terms
Carefully check what type of pension you have. Some workplace pensions are defined benefit (aka final salary or average salary) schemes, and are completely different from defined contribution (aka money purchase) workplace and personal pensions.
It’s important to know the benefits of each type of pension, and how important these are to you. Defined benefit schemes provide a set income on retirement, making them a lower risk form of pension. However, sometimes it can still make sense to cash them in and transfer the money to a new pension.
Similarly, personal pensions can have important features like guaranteed annuity rates (GARs) or life insurance included, which would be lost if you transferred away. So it’s vital to check and see if your current pension has any special terms – sometimes known as ‘safeguarded benefits’.
Check both the fund value and the transfer value
Why check both? Because if there is a difference between the two, this suggests that there is a penalty for transferring. Penalties can be imposed for a variety of reasons. If there is one, it’s worth checking to see why it is in place and when it might be removed.
If the fund value and the transfer value are the same, then it means there is no penalty for transferring. However, it’s still worth checking whether there are any fees or charges for transferring, as these may not be reflected in the transfer value.
We hear some pretty rotten stories of clients struggling to communicate with their pension companies, and that shouldn’t be the case. You’ll know by now that pensions have charges, and the service you receive should be reasonable in the context of those charges.
It’s not just a simple thing like being able to get through to the right person when you have a query. Service can also include having easy online access to your account, being able to view transactions on your pension like a bank statement, or receiving statements in the form you want to receive them.
Having covered all of the points above, you should in theory be able to make a calculated decision on consolidating your pensions into one pot. However, this decision may still be a hard one; what you’re trying to find out is whether you will be financially better off in retirement by transferring, or by staying put. For this reason, you may well need professional advice.
Here’s an example of how this kind of decision can work in practice.
Pension consolidation in action – a case study
Bryan works in the construction industry, where it’s normal for employees to move from job to job quite a bit. So by the age of 45 Bryan had managed to accumulate an impressive six pension plans, all with different providers.
Now, although Bryan is good with numbers and enjoys planning his future, the finer workings of pensions leave him confused (and frankly bored). So we set to work gathering all the information we need to assess every one of his plans. Having made sure we knew exactly what he had and what was offered by each pension plan, we recommended that he consolidate them all into one ‘super pension’.
A key reason for this recommendation was that six different pensions also meant six different investment strategies, which did not necessarily complement each other. It also meant six different sets of administration fees – so it was both a messy and expensive arrangement. The new pension gathered together all of those scattered funds and put them in a single, personalised portfolio that was more suitable for Bryan’s needs.
Now Bryan has a single pension which he can move his old employer plan into whenever he changes jobs (assuming it makes sense to do so). That will make his retirement planning much easier when the time comes, and in turn will make it easier for him to check whether his saving is on track to meet his retirement goals.
Very many UK workers are in a similar position to Bryan. If you’re among them, talk to an adviser about whether you’d be better off consolidating your pensions.
About the author
Jaskarn Pawar is a Chartered Financial Planner and Certified Financial Planner at IFA firm Investor Profile. As an investment specialist he also holds the Investment Management Certificate and has worked for some of the most highly regarded financial planning firms in the City.