With many people changing their careers and employers throughout their working life, by the time they come to retirement they can end up with a number of different pension pots. As different schemes have different rules, it can be difficult to know whether or not consolidating the plans into one is the right option. In this article, Bertrand Pole, a pension technical specialist, and Stacey Seaborne-Hall, a financial planner from our Exeter team, answer some of the most frequently asked questions about pension transfers.
BP: There are a number of benefits to consolidating your pensions. One of the greatest advantages is the ease of administration. Receiving lots of statements and paperwork for different plans can feel overwhelming. With just one pension, it’s much easier to keep a track of everything.
As you’ll only receive statements for one plan, record keeping becomes much easier too. This is particularly useful if you want to make a large, one-off contribution and to make use of your pension carry forward allowance. It can end up being quite a mammoth task if you have a multitude of pensions that you’ve been contributing to, because you have to contact each provider for information and basically, you’ll be held back by the slowest one of them.
I’ve also found that when pensions are consolidated into one, monitoring their investment performance is much simpler. Pension providers tend to report past performance in different ways and sometimes these reports are made at different times – one may come at the beginning of the year, another in the middle and the other at the end. If you have one pension, you know every time where you stand and how it is performing. What’s also easier about this is the control you have over the underlying investments. So it’s quite important if you’re going to have just one pension, that you have one that offers a lot of fund choice, is reasonably priced and has a good administration team.
One of the main misconceptions about transferring your pensions into one is that you will reduce your investment diversity, which is not necessarily true. Quite often, when we’ve spoken to clients and looked at all their pensions, we’ve seen that they’re not diversified at all because they’ve stayed in the ‘default’ funds offered by each provider and these are often very similar – for example, they might be all UK funds. If you find a provider with a good selection of funds, you can have a range of investments all held within the same plan.
Another one of the main potential benefits of consolidating your pensions is that there may be a reduction of charges. Also, with some schemes, when the fund value of the pension goes above a certain amount, you get a discount which you may not qualify for if you spread the contributions across different providers.
SS-H: I agree with all these points. From a financial planning perspective, I would say the main benefit of consolidating your pensions into one plan is that it makes it easier to manage, especially as you get older. If I have a client with numerous plans, it’s very difficult to make sure they are being reviewed annually for their performance, how much is being taken in charges and if the contributions are set at the right amount to meet their retirement objectives. If they are all in one place, you know where you stand.
If your pensions are all in one place, it can also help you to see if the underlying investment strategy is still suitable for you. Different pension providers offer different strategies - some might have 10 options while others might have many more to choose from. It’s about understanding what the right investment option for you is and then consolidating your pension savings into the right strategy.
You may want to transfer your pensions in order to give yourself greater choice and flexibility with your retirement savings. Some schemes which were established before 2015 (prior to Pension Freedoms) may not have the flexible options that other newer pensions have. Income drawdown (also known as flexi-access drawdown) came into effect in 2015 and it allows you to access your pension savings whenever you need to from age 55, while reinvesting your remaining funds in a way that is designed to provide an ongoing retirement income. If you retain an older pension, when the time comes for you to access it, you might have to transfer it anyway to another one in order to receive the benefits you are looking for.
BP: The cost of transferring varies between providers. Whenever you move pensions, there are considerations to be made and one of them is the exit costs versus the cost of the new pension. Exit fees are capped if you are close to retirement, so in a lot of cases, the exit costs go down with time.
To balance out the trade-off between the exit charges and potential reduced ongoing charge, you need to compare five years’ worth of charges on the one new plan against the exit charges from all the plans you are looking to consolidate and then make an assessment. If you’re not planning on touching your pension for another 10 years or longer, then some penalties would become cost effective in the long term because you will be saving over the longer term.
SS-H: I think it’s important to say that while costs are important, it shouldn’t always be assumed that cheaper is better as it often all depends on you and your objectives. If you’re fee-conscious, then we need to assess the cost of the current structure, the benefits of staying with this provider and check if this is the right approach for you to continue with going forward. When you consider what you want to achieve, the fund or underlying investment strategy may be more expensive for a reason as it may give you more of a structured and suitable approach. In some cases, I have found that a new plan costs more than the old ones, but sometimes you have to pay more so that your pension can achieve what you want and need it to. It is about finding that balance as your current pension structure might be cheaper but it’s not always going to be the best option for you in the longer term.
SS-H: Not all pension schemes can be transferred and there are definitely a number of things you need to look out for.
Defined benefit schemes, or as they are more commonly known, final salary pension schemes, are based on your length of service and earnings within that employment period. Defined contribution schemes, or occupational pension schemes, are based on the contributions that you and/or your employer pay in to the pension plan, along with investment growth achieved from the underlying funds. Defined benefit schemes offer a tax-free lump sum and then an income for retirement whereas with defined contribution schemes, you can take a lump sum or you can take income flexibly. 25% of the total value can be taken tax-free.
You can transfer a defined benefit scheme into a defined contribution scheme but once you have made the move, there is no going back. If you are looking to do this, you should take professional financial advice because a defined benefit scheme can offer benefits that you may not be aware of and if you’re going to forego them, you need to clearly understand the potential advantages and disadvantages. In fact, since 2015, it has been mandatory to take professional advice if you are looking to transfer out of a defined benefit scheme (or any other pension scheme with safeguarded benefits) if the transfer value exceeds £30,000. In the majority of cases, clients are advised to stay in the scheme. At Tilney, we start with the assumption that the transfer will not be suitable and will only be considered if there is clear evidence that it's in your best interests.
You also need to look out for the loss of existing pension benefits. Some older pensions might allow for a higher amount of tax-free cash or could have a guaranteed annuity rate which may be higher than the rates offered from an annuity bought on the open market. That’s where it’s really beneficial to have an adviser to look at your plan and assess all the intricacies before transferring out.
BP: I agree that loss of benefits is definitely something you need to look out for. Some of the old legacy schemes have what’s called scheme protected tax-free cash, which means that they are linked to a workplace pension and your salary at the time. Even after A-Day in 2006, where the rules surrounding most pensions were changed to offer more flexibility and simplicity, some policies have stayed under the old rules, meaning that you could take more than the 25% tax-free cash amount as Stacey mentioned. I’ve come across policies where you could take as much as 97% in tax-free cash. The advice there was to look at the funds and make sure the pension was diversified and in line with the client’s attitude to investment risk, but not to move it. When the client retired, it was recommended to just take the cash out as they didn’t have to pay Income Tax on the majority of that pension pot. With these types of plans, you do have to take the tax-free cash all in one go. If you have a large pension pot, you have to consider if it’s worth taking it in one go because you might end up with Inheritance Tax issues.
A lot of older schemes, particularly those that go back to the 1980s and 90s, offered guaranteed annuity rates. What’s happened is some people have looked at these schemes and wanted to consolidated them with another pension as they think the value is low. When we’ve looked at them, we’ve seen some very high annuity rates, with some being set as high as 11% or 12%. Even if there is only £40,000-50,000 in the pension, the income on offer is very high. We’ve recommended that these clients keep these plans as they are until maturity and take the guaranteed income.
BP: You are protected by the Financial Services Compensation Scheme (FSCS) as long as the pension provider is UK-regulated. If the pension product qualifies as a ‘contract of long-term insurance’, as would be the case for an annuity, then the FSCS will cover 100% of the scheme with no upper limit. Individual pensions have different rules, so you may be limited to £85,000. Therefore, it is worth checking with the provider who is required to tell you what your compensation limit is for each policy.
If a pension company goes bust, the funds are kept separate from company money – that is a legal requirement.
If you are invested in a SIPP (Self-invested Personal Pension), the FSCS will pay out £85,000 per person, per firm.
Additionally, you could be entitled to compensation under the FSCS if you have received bad advice in relation to your pension. The limit currently stands at up to £85,000 per person, per firm.
Defined benefit schemes are treated differently and might be protected by the Pension Protection Fund (PPF).
SS-H: If you are having your retirement plans reviewed by a financial planner, then it is definitely easier and less time-consuming if they are all in one place. You can put an income drawdown plan in place which is simple and streamlined. If it needs to be tweaked, which is often the case when your circumstances change, it can be done quite easily.
BP: Speaking of income drawdown, it’s worth noting here that rolling all of your pensions into one might be a good idea. Due to the cost of administering drawdown pensions, many pension providers state that the pension has to reach a minimum value before they will allow you to go into flexi-access drawdown. For example, if you have a pension pot which is worth between £20,000-30,000, it might be difficult to find a provider who would allow you to put this amount into drawdown and you may have no choice but to take the lump sum. If you had another two or three pensions with other providers which were of a similar value, you could consolidate them all into one and therefore increase the value, meaning that you might be able to go into drawdown. From this stance, it’s definitely easier if all of your pensions are in one place when you come to retire.
It's important to remember that income drawdown is not the only way of accessing your pension and isn't suitable for everyone. Therefore, it may not be necessary to transfer your existing pension.
Tilney’s financial planners can help people to decide whether or not pension consolidation is the right choice for them. If you have any questions or would like to discuss your own situation, we offer free initial consultations over the phone with a local financial planner. They can’t give you advice during this consultation, but they can give you some guidance, let you know if they think you would benefit from personalised financial advice and explain the costs involved. You can book a free consultation online or call us on 020 7189 2400.