Keeping track of store cards, credit cards, current accounts, direct debits, utility bills, and the rest of our daily financial commitments can be difficult. Very often, we opt to simplify these and put them in one manageable place so we know what we’ve got coming in and going out.
The same can apply to pensions. The days of ‘a job for life’ are gone and it’s normal to have an employment journey with multiple pensions. Keeping an eye on all of these is tough, especially if you can’t remember who the scheme is with and when you paid into it.
Pension consolidation is a process that allows you to pull all the strands of your retirement savings together into one manageable pot. There may be several benefits to doing this, including lower management charges, which can increase the value of your fund over the course of its investment.
Making choices about your pension
You can choose to move and manage the consolidation of your pensions yourself, but this requires a level of confidence in your financial knowledge. Some platforms and providers will even decline to act with you directly and will only deal with authorised and regulated financial advisers. You will also need to decide which of your pensions to keep, whether to invest in new funds – and which are the most appropriate ones for you.
Before you make any decisions, it’s important to know the benefits and charges you are paying on all of your pensions, not just those you are currently paying into.
Let’s say you are paying an annual management charge of one to two per cent on each of your pensions, but you aren’t investing in them – you could be losing money each year.
One of my clients came to talk to me about a ‘With Profit’ pension that they were no longer paying into. They didn’t realise that their bonus rate was zero per cent, and as nothing was going in, nothing was happening to that investment. For ten years, their pension was stagnant and the client was completely unaware.
Risks of transferring away
Before consolidating your pensions, you should also consider whether you’ll lose any of their benefits. Potentially, you could transfer out of a pension without understanding what you are giving up, but if you take advice, it shouldn’t happen – or your adviser will inform you that you will be giving up benefits and help you find a more suitable pension.
When looking at your pensions, it’s important to know the amount of investment risk attached to it compared to the level of risk you are comfortable accepting. Low-risk pensions are safer, but your money is unlikely to grow as quickly as higher-risk pensions, whose value (like any investment) can go down as well as up, and is not guaranteed. How your pension is invested and its risk level can change depending on the strategy it adopts. Choosing your pension’s investment funds will also depend on the level of risk you are comfortable with, which can change over time.
Changeable risk and unsuitable benefits
Many existing plans will have a ‘life-styling’ facility – a benefit that may no longer be suitable for clients today given modern ‘at retirement’ options and the increase in life expectancy (in England, ONS says life expectancy is now 76.8 years for men and 82.4 years for women). With life-styling, the investment risk is typically managed out from age 50 and underlying funds change to become lower-risk. This benefit was designed to allow clients to make an annuity purchase at age 60 or 65, however, if you don’t intend to draw your pension until later or to use flexi-access drawdown at retirement, then this money may not be an appropriate investment strategy.
There are more options now thanks to pension freedoms rules, which came into effect in 2015. Life-styling is just one example of how a single pension benefit can be an advantage to some but hazardous to others.
What can a financial adviser add to the process of pension consolidation?
Many of the clients who consult me about their pensions do so because they don’t know what they’re looking for. They have the ostrich ‘head-in-the-sand’ approach because they just don’t know how their pensions work and end up doing nothing. To help clients consider what they want from their pensions, I often ask questions like:
- Do you want a flexible / phased retirement?
- What are your aspirations and goals for the future – and into retirement?
- How can you use what you already have to help you get there?
When speaking to my clients, I’m able to explain what their pension arrangements mean for them in a human and client-friendly way. If they agree to my recommendation, Wren Sterling take on the significant work of obtaining scheme information and creating a retirement plan.
With support from a financial adviser, you can benefit from an ongoing advised service, with regular reviews and a risk-appropriate portfolio monitored and managed on your behalf.
How do you choose what to recommend?
There are many different types of pensions and retirement options. Choosing the most appropriate solution requires advisers to discuss a client’s circumstances and their needs. This will include their assets, lifestyle, health, attitude to risk, and what they want to happen to their funds after their death.
Pension consolidation in practice
When I first met John, 59, he had undergone significant heart surgery the year before, causing him to rethink his priorities and his retirement plans. His understanding of his current pension arrangements was that he believed he would receive a small pension income at age 60, a more significant pension income at age 65, and the state pension at age 67. He felt he would have to work to age 67 (another eight years), irrespective of his health, as his personal pensions weren’t enough to allow him to retire early – even though he would rather stop working at age 63 to coincide with his wife’s retirement. Following his surgery, John also wanted to go on a ‘holiday of a lifetime’ but lacked the funds to do so.
I researched his eight existing personal pensions (total value around £250k), which had differing investment strategies and future retirement ages and were invested in a variety of funds. None of his pensions allowed him to go into a drawdown arrangement and so I looked into consolidating his pensions. My recommendations will allow him to:
- Purchase an enhanced annuity* and retire early at age 63
- Have access to total tax-free cash of £62.5k (25 per cent of £250k)
- Release enough tax-free cash immediately to fund his proposed trip at age 60
- Consolidate all eight plans into a single personal pension with one overall investment strategy aligned to his attitude to risk
- Take the offered final bonuses on his ‘With Profits’ pension policies
- Retain the capacity to take tax-free cash or ad hoc withdrawals from the remaining funds flexibly
*An enhanced annuity pays a higher annual income for those with medical conditions that may reduce their life expectancy. Even if you suffer from a minor ailment such as asthma, you can apply for an Enhanced Annuity. Please note, this case study should not be interpreted as a suitable investment strategy and you should seek independent financial advice regarding your own retirement plan before embarking on any course of action.
Important: Accessing pension benefits early may impact on levels of retirement income and access to means-tested benefits, and is not suitable for everyone. You should seek advice to understand your options at retirement.
There may also be taxation implications. You should seek professional advice on your own circumstances. The rates of taxation may also be subject to change.