Should you consolidate your pensions?
Most people accumulate a number of pensions as they move from one employer to another, and it can be hard to keep track. Combining these pension pots not only makes life easier, but helps ensure that investments are managed in the most effective way. What’s more, a self-invested personal pension (SIPP) can provide added flexibility in retirement. In this article, we consider the benefits and the potential pitfalls of pension consolidation.
Advantages of pension consolidation
1. Easier to manage
With all investments under the same umbrella, it’s easier to keep track of investments and see how they’re performing. Updates come from a single source and are accessible online. Gauging likely retirement income is also less complicated.
A large number of pensions have been ‘lost’. The Association of British Insurers estimates that around 1.6 million pots, totalling some £19.4 billion, have been misplaced or forgotten about. Anyone who needs help locating old pensions, can contact the Pension Tracing Service.
2. Potential for improved investment performance
Some pensions only provide access to a limited range of investment funds. Whereas a SIPP may provide access to an almost unlimited range of investments, extending beyond just collective funds. With all investments under the same umbrella, it is easier to ensure a well-diversified strategy to achieve what you wish for in retirement.
3. Greater flexibility
Pension consolidation can be particularly helpful for those getting closer to retirement. Many older-style pensions do not allow you to flexibly withdraw money from your pension. A modern pension can provide greater freedom around how money is withdrawn
Until 2015, your only option was to buy an annuity with your pension fund. The pitfalls of this were that you might be buying into a low fixed rate return for the rest of your life, and the income ceased on your death. Now you have greater choice as to how you access your income in retirement, and indeed pass on your pension pot to your beneficiaries as part of your estate planning. However, you should check whether your existing plan allows this degree of flexibility and planning.
4. Reduced charges
Older pensions may have higher charges, which can eat into investment returns. Consolidating pensions may well lead to reduced charges. However, before making any changes, it’s important to seek a professional and objective comparison of the charges made by your existing and new providers. In addition, it’s important remember to consider the level of service offered, and whether it will meet your objectives.
5. Good for motivation
Watching your pension grow can be very motivating, so with better access to information, you may even be tempted to make bigger contributions. Keep in mind that you’re allowed to invest 100 per cent of income and up to £60,000 per year in a SIPP.
6. And for company owners
If your company owns property, it may be worthwhile considering selling it to your pension scheme and letting the property back. By doing so, rent would be a tax deductible corporate expense, and would accumulate in your pension scheme and property value increase would be free of capital gains tax. However, it is essential to take professional advice, and to consider the costs involved versus the potential benefits.
Reasons for not consolidating your pension
1. You have a final salary pension
While there may be occasions when it may be beneficial to transfer a defined benefits scheme, this is an extremely complex area, and there will often very strong reasons not to do so. You should never proceed on this basis without taking specialist advice.
2. Your pension has special benefits that cannot be transferred
Some pre-2006 pensions have ‘safeguarded benefits’ that might be lost if you consolidate your pension. These include guaranteed annuity rates, protected tax-free cash or guaranteed minimum pensions.
3. Your pension receives employer-matched contributions
If you currently pay into a workplace pension, your employer will typically match your contribution up to a certain rate. It would be unwise to transfer your pension unless your employer agrees to contribute into your new scheme.
4. Exit charges outweigh potential benefits
Some pensions may charge you an exit penalty. It’s essential to consider any exit charges and weigh up the cost of switching versus the potential benefits.
5. You may miss out on ‘small-pot’ privileges
This applies to those still paying into a defined contribution scheme. If you start withdrawing income, the amount you can pay in and still get tax relief, is reduced from £40,000 a year to just £4,000. This won’t normally be triggered if you cash in small pots or less than £10,000. Those who consolidate small pots, will lose this benefit.
‘Pension planning now offers more flexibility than in the past, and pension consolidation can be extremely beneficial,’ explains AJB Wealth’s Paul Willans. ‘However, everyone’s circumstances and needs are different, so it’s essential to take advice and make an informed choice.’
For general advice on pension planning, particularly in the period leading up to retirement, see our article on planning for retirement in 5 to 10 years’ time.
If you would like help with your retirement planning, including consolidating your pension, the team at AJB Wealth is well-placed to help. To arrange an initial consultation, please book a meeting, or call us on 01428 774 070.
Important: The content of this bulletin is for general consideration only, and does not constitute advice. No action must be taken, or refrained from being taken, without advice and this company accepts no responsibility for any loss occasioned as a result of any such action, or inaction. You are also reminded that investments can fall, as well as rise, and, in the event of early encashment, you may receive less back than your original investment.
