Pensions: Should I tidy them up?

How many pensions do you have? In pre-retirement, that might be more difficult to answer than you anticipate; career aspirations have changed over time and culture (rightly or wrongly) no longer applauds a dedication to one employer. Old company and personal pensions might be dotted around numerous providers. Factor in automatic enrolment in recent years and you could have more pensions than you realise!

Tracking them down can be the first challenge. Dig through the important paperwork drawer and you could find a long-lost statement from 1992.

For simple administration, consolidating your schemes has obvious benefits; often you can log in to a provider’s website to check the progress of your investments. More importantly, you should benefit from a coherent, risk aligned, regularly reviewed investment portfolio. But, before you decide to tidy up your pensions, here are five key considerations (with a bit of a history lesson thrown in!):

1. Charges

Some older pension schemes had complex charging structures, on occasion amounting to much more than modern equivalents. We won’t bore you with the exact details of each, but Bid/Offer Spreads, manipulated Allocation Rates, Initial and Capital Unit charges were all types of additional charge sometimes taken on top of the Annual Management Charge.

In fact, the FCA have recently pointed out that by switching from a higher cost to a lower cost provider, people taking flexible pension income could increase their annual income by as much as 13%.

There may be situations where the charges of your existing schemes can be lower than a recommended alternative, a Stakeholder scheme with capped charges for example, but the cost is only one part of the consideration to transfer. The Fund choice may be limited, which would restrict your portfolio composition and could influence the level of risk your pension is exposed to.

2. Investment options

Value for money takes into account much more than charges in isolation. A low-cost pension with a selection of only 10 poorly performing investment funds could have a more detrimental effect on your pension value than a comparatively expensive scheme with a ‘whole of market’ investment range, permitting a more diverse and better risk aligned portfolio.

3. Benefits & guarantees

Old With Profit funds can have guaranteed growth and/or annual bonus rates, designed to smooth market fluctuations and provide a steady rate of growth for your pension fund. These guarantees would be lost on transfer.

Then we have Section 32 schemes, otherwise known as Buyout Polices, which are a relic of the early 80s. They accepted one-off transfers from old occupational pensions and are known to offer guaranteed annuity rates, which might be especially attractive today.

Furthermore, some pensions offered enhanced tax-free cash above the usual 25%, which would again be lost on transfer.

You’re getting the idea by now, there’s an awful lot of small details to consider and you need to know the right questions to ask providers, as finer details are sometimes missing from standard information packs they distribute.

4. Exit penalties

With Profit pension investments could have a Market Value Reduction (MVR) if you transferred it before your nominated retirement date, meaning a portion of its value would be lost. Other schemes reclaimed charges when a transfer occurred, so there are several situations where the Transfer Value of your pension could be lower than the current Fund Value.

5. Pension Freedoms

A number of older pensions do not allow Flexi-Access Drawdown, which thanks to Pension Freedoms allows unlimited withdrawals from age 55 onwards. To benefit from Flexi-Access Drawdown these pensions would need to be transferred, but of course, taking all other points we’ve discussed into account.

Another significant Pension Freedoms change introduced was the ability to transfer out of Defined Benefit, otherwise known as Final Salary Pensions, into a Defined Contribution Personal Pension. In fact, Between 1st April 2017 and 31st March 2018 The Pensions Regulator recorded £14.3 billion transferred by 72,700 people, all of them giving up a guaranteed lifetime income in the process. That’s a big decision to make before undertaking a tidying up exercise!

What should you do?

Knowing whether to tidy up your pensions is often about knowing the right questions to ask your existing providers, especially with schemes set up under old legislation.

To make sure you’re not losing valuable benefits, engage a financial adviser to properly understand the implications of pension consolidation. Your circumstances are unique to you; an adviser can help you make the most appropriate decisions and best prepare you for a financially secure retirement.

Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits.

Accessing pension benefits is not suitable for everyone. You should seek advice to understand your options at retirement.

Past performance is no guarantee of future returns and the value of investments and the income they produce can fall as well as rise. You may not get back your original investment and you may lose all your investment.

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