Years ago, employees would work for the same employer for the majority or even all of their adult life. In return, they would receive a generous final salary pension, payable for the rest of their lives. Nowadays, we move employers much more frequently and typically we end up accumulating pension pots across numerous providers. This then begs the question, should you consolidate your pensions?
This article will provide you with some important points to consider, before you transfer your pensions:
Should I Consolidate my pensions?
One key benefit is the ease of administration, rather than having your plans all over the place, it is easier to manage them when they are with one institution. This is especially useful when utilising flexi access drawdown or taking income from your pensions.
The administrative ease of consolidation is important, but there are several factors you should consider before combining your pensions:
- What are the costs of my existing pensions?
- Where are my investments held and how have they performed?
- Do the investments meet my ethical preferences? If not does the provider offer an alternative that will?
- What are the benefits payable to my beneficiaries upon death?
- Does my plan contain any guarantees that would be lost on transfer?
- What are the options at retirement?
What are some possible downsides of transferring my pensions?
It is not so common to see now, but older style pensions can have several precious benefits that could be lost upon transfer.
The below list is not exhaustive, but covers the benefits we typically encounter:
- Guaranteed Annuity Rates (GARS) – Often higher than what you would receive on the open market today
- Protected tax-free cash – Some plans offer tax free cash in excess of 25% which could be lost upon transfer
- Guaranteed growth rates – This could mean the provider guarantees an annual growth rate, irrespective of market conditions
- Nasty exit penalties – So this isn’t a benefit, but sometimes providers can levy high fees or exit penalties, if you transfer out before your retirement date, you need to ascertain whether or not the cost of transferring outweighs the benefits.
Some reading this article may have final salary pensions, these are extremely valuable and If you would like to consider a transfer out from a final salary pension, you should think very seriously before doing so and obtain specialist advice.
Tim came to us as he wanted to consolidate his two pensions into one arrangement and cash them in, he needed the “signature” of an independent financial adviser (IFA) in order to do so. When we discussed it in further detail, Tim said “I want to have the money in my bank account”. This is a rationale we hear often but, having the money in your bank account can often result in the following:
- Interest paid on your cash is less than inflation and so your cash is worth less in real terms
- If you want to cash your pensions in, you can often pay unnecessary tax – more on that here
- Any monies withdrawn from your pensions could form part of your estate for inheritance tax purposes
There are other reasons to be careful when deciding whether to consolidate or cash in your pensions but there was one obvious reason for Tim. Tim had an older style pension which had a Guaranteed Annuity Rate. It meant that Tim would receive £13,000 per annum in retirement. Tim received a transfer quotation of £110,000.
Tim wanted the £110,000 in his bank account or transferred to another provider so he could cash it all in. I posed the question to Tim, if there was a Buy To Let (BTL) property that you could purchase for £110,000 that would pay you £13,000 a year until the day you die, with no issues with tenants, no maintenance fees and no stress of unexpected bills, would you take it? Tim said what most of us would, yes!
Tim thought about it a little more and eventually decided he would stay put, he had 2 years until his expected retirement date on the policy and didn’t need the money right now.
To be clear, there are other things to consider such as death benefits, other assets held and your overall life objectives. These might mean that a pension transfer is in your best interests even with guarantees, the above is just to serve as an example of how important it is to know and understand exactly what benefits you are giving up if you do transfer away.
Finally, if you are considering a transfer, the FCA has a number of warnings for retail investors. These are aimed at those considering a final salary pension transfer, but they remain relevant for anyone considering a transfer or pension consolidation.
- Don’t make decisions about your pension quickly – take your time to make sure you understand the risks
- Don’t transfer just because your colleagues/friends are doing the same
- Don’t talk to companies who contact you out of the blue offering to talk about your pension options
- Avoid scams and unusual investments, marketed by people or companies who tell you they can give you higher returns or early access to your pension
You can read more here Considering a pension transfer
It is not always easy to tell if you should consolidate your pensions and there are a number of factors not included in the above that you should consider before doing so.
If you’d like independent pension advice from a Chartered Financial Planner, please get in touch. Our first meeting is always on us.
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