Pension consolidation is probably not at the top of your financial to-do list, another of those topics that can be revisited at any time. Is there any urgency if your funds are invested and you're receiving your annual updates?
When you begin to look into pension consolidation in a little more depth, you will notice numerous pros and cons, some of which can dramatically impact your long-term finances. Before we start, it's essential to realise that not all pensions will be suitable for consolidation; therefore, speaking with your adviser is vital.
As the term suggests, pension consolidation involves amalgamating two or more pension funds. This then prompts the question, how many pension plans does the average person hold?
This might surprise you! For example, the average person in the UK will have around 12 different jobs over their working life. This means potentially 12 different pension funds of varying size and with numerous benefits. Consequently, it can get relatively complicated towards the end of your working life, hence the need to consider consolidation.
There are two main types of pension fund which are known as:-
While relatively rare today, defined benefit pension schemes are based on your final salary and years of service with your employer. Consequently, if there is a funding shortfall in retirement, your employer will cover the difference.
Defined contribution pension schemes are more commonplace today because there are no guarantees and, therefore, no additional liabilities for your employer. When you choose to access your pension, the value of the funds will be based on contributions over the years and the growth of the investments.
Before considering a consolidation of your pension fund, it's essential to check the eligibility, as some may have restrictions. It is also unlikely that consolidating a defined benefit pension scheme would be in your best interest as this would remove various guarantees.
We have considered why you might consolidate your pensions and eligibility; we will now look at the broader benefits.
While this is a crucial issue, it mustn't be the main factor because investment returns and your long-term pension funding should always be the main focus. However, the more pension plans you have, the more chance you could lose track if you change address, change employment, or move abroad.
In 2022, a report by Standard Life revealed a staggering 2.8 million pensions described as “lost”, with a combined value of £26.6 billion. While there are ways and means of tracing pension funds further down the line, inactivity over this period could prove costly in the longer term. Reducing the number of pension plans you have will help to simplify long-term administration.
In recent times, we have seen a streamlining of pension fund services and more transparency about costs, although there are still variations across the industry. Indeed, you may find that some older pension plans will still be based on historical pricing policies, which may be relatively expensive compared to today.
Many people find that consolidating their pension assets can lead to more competitive costs, including annual charges and transaction fees. When considering that your pension assets will likely be invested for over 40 years, charges can significantly affect your long-term returns.
The more pension plans you have, the greater your chances of losing track of individual investments and performance. You may have older pension plans focusing on popular assets at the time, which may be less popular today, potentially delivering substandard returns.
By consolidating your pension assets, you can take greater control over your investment strategies (whether advisory or managed) with the potential for improvements in long-term performance. While diversification is important, your broader investments must align with your investment principles and attitude to risk.
When looking at pension consolidation, it is as important to appreciate the pros and the cons so that you understand the broader implications.
As discussed earlier, a defined benefit pension scheme will provide a guaranteed income based on your service and final salary. There are regulations to ensure that the appropriate advice is taken before proceeding with this type of transfer. Other pension plans may have certain guarantees and benefits, such as life insurance cover, that may be difficult to replicate if you consolidate your plans.
If you decide to consolidate your pensions, you may find your plans are subject to exit charges hence the net transfer value may be less than you expected. While excessive fees do warrant consideration, it’s important to look at the consolidation of your pension assets in a broader context and on a long-term basis.
In theory, the process of transferring your pension assets into a consolidated fund is relatively straightforward, but in practice, it can be complex. This is where your pension advisor can assist in collating the appropriate paperwork, obtaining the relevant valuations and contacting your various pension providers directly.
Before consolidating your pension assets, you must take advice and gather as much information as possible about your pension plans and investments. This will include information such as:-
Many automatically assume that their retirement date, the day they can access the funds, will be the same across all their pension assets. This is not the case. Some older pension schemes will have early retirement ages, while more recent plans will take into account new legislation and extended retirement dates.
A lot of this information will be available online, although you can contact your pension provider directly or authorise your financial adviser to gather this information on your behalf.
Recently, we have seen a raft of pension regulations that have brought the industry into the 21st century, many looking to enhance freedom of choice. When consolidating your pension assets, there are several options, which include:-
It is essential to recognise that while your employer is obliged to contribute to your workplace pension, there is no such legal obligation to your personal pension. Many employers contribute to personal pension plans, but this should not be taken for granted.
In further developments, the UK government recently announced plans for a "pension pot for life," which would likely encourage saving and simplify administration. One of the options currently being discussed is the introduction of a legal obligation for your employer to pay contributions to your personal plan.
This is still at a relatively early stage, although the financial services industry has already identified and expressed several concerns.
Ensuring pension fund contributions during your working life is essential, but the management of your funds should be seen as an ongoing process. It's important to keep track of your pensions, fund performance, charges, and your forecasted income in retirement. You will likely need to make various adjustments during your working life and retirement, and you must seek advice.
We have seen numerous pension regulation changes in recent years, with more expected in the short, medium and long term. Whether looking at consolidation, investment strategies, attitude to risk or funding, actions you fail to take today can significantly impact your long-term returns. Pension consolidation simplifies administration and gives you greater control over your assets, allowing you to identify underperforming funds and make changes.
Your pension assets should be reviewed regularly, in line with your broader finances, to determine potential changes, and this also ensures you keep track of all pension plans.
Unfortunately, many investors see potential pension fund consolidation as an element of housekeeping that can be done anytime. The reality is that tens of billions of pounds are tied up in “lost” pension plans, which have been detached from their owners for various reasons. These funds are still paying fees, perhaps inactive regarding investment management, and probably falling behind markets in relative terms.
Regarding the consolidation of active funds, as we mentioned above, there are a number of different factors to consider. On the surface, there may be occasions where it appears perfectly sensible to consolidate two or more pension funds, but on further investigation, it may not be the right thing to do in the long term.
As an experienced wealth manager, I have seen the impact of regulatory changes, market movements and, in some cases, incorrect advice. Looking at pension consolidation in isolation and as part of your wider personal finances is essential. A critical part of your long-term finances, it is important that returns are maximised within a controlled environment and a reasonable fee structure.
If you have concerns about the structure of your pension assets and the long-term impact on your finances, it’s important to act sooner rather than later.
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